Refinancing & Divorce

Divorce can affect a borrower's credit score.

When a borrower looks to refinance a mortgage, a lender looks at his debt-to-income ratio, the value of the home and the credit score of the borrower. Oftentimes, a borrower initially qualified for the mortgage debt using both spouses' income. In the event of a divorce, however, only one income is considered in the transaction. This can make it harder for the borrower to qualify for the refinance.

Debt-to-Income Ratio

A borrower's debt-to-income ratio is calculated by dividing her total monthly debt payments into her pretax monthly income. The resulting score should be 36 percent or less to qualify for a conventional mortgage, and 45 percent or less to qualify for a government mortgage, such as USDA, FHA or VA. This ratio quickly gives a lender the information needed to determine a borrower's ability to repay the refinanced debt. If the couple qualified for the original debt jointly, she may not be able to qualify for the refinance with significantly less income in the ratio.

Separate Finances

In the event of a divorce, many are required by the divorce decree to separate all finances. This results in joint trade lines or credit accounts being removed from a borrower's credit report. If so, this can positively or negatively affect a borrower's credit score. Additionally, if an ex-spouse does not pay a debt that is listed as a joint debt and it is left on the borrower's credit report, it could impact his ability to refinance the mortgage.

Time Frame

In some cases, the judge requires an ex-spouse to refinance the mortgage within a certain number of days of the divorce decree. If it cannot be completed, the ex-spouse may have to sell the house to remove the other spouse's name from the debt. The goal is to remove all financial ties between the ex-spouses.

Considerations

In some cases, the ex-spouse may purchase the house from the other spouse to avoid the refinance issue, if one spouse is left with significantly higher cash reserves than the other. Additionally, a contract could be drawn up that requires the spouse left with the house to repay the debt on time in the event that a refinance or a sale of the home cannot be completed in a timely manner. This helps both ex-spouses avoid the damaging credit effects of a foreclosure.

Benefits

A quick refinance of the debt removes an ex-spouse from the deed and gives the spouse with the house the control of the asset. It also protects her credit from the damaging effects of a spouse who refuses to pay on the debt out of spite or inability to repay the debt.

References

• Federal Reserve: A Consumer's Guide to Mortgage Refinancing