A divorce decree may call for the spouse remaining in the marital home to "buy out" the exiting spouse's interest in the property. A divorce court may decide that you get the home subject to a refinance that removes your ex's liability on the loan. Also, many newly single homeowners need to cash out equity to give the former spouse their fair share of the marital assets. However, you may have to sell the home altogether if you can't obtain the refinance on your own.
Falling Out of the Refinance Realm
Credit problems and insufficient income can prevent a divorcing homeowner from refinancing. In addition to meeting a mortgage lender's minimum credit-score and income guidelines, which safeguard the new loan's repayment, the spouse who will remain solely responsible on the refinance loan must have an acceptable employment history, debt load and reserves. If you fall short of these basic financing requirements, or you have a recent bankruptcy, court judgments or foreclosure, you may not qualify for a refinance.
Revise Decree from Refinance to Sale
If the court orders you to refinance but you can't get the new loan, you can go back to the drawing board and have the order amended. If the court decides you can't refinance and you must sell the property, you can then move forward with a real estate broker to list the home for sale. You should instruct the escrow agent or the attorney that handles the closing or "settlement" process of the sale to distribute the proceeds according to the revised decree. A sale of the marital home pays off any existing mortgage debt you may share and releases both of you from further loan responsibility.
Underwater Homeowners Have it Harder
If negative equity prevents you from refinancing, you may have to ask your lender for assistance. Negative equity occurs when you owe more on the home than the home is worth, which hinders both a refinance and sale. You may have to request a short sale in which your lender lets you sell the home for less than the amount owed on the mortgage. Or you may also have the option of deeding the home back to your lender via a "deed in lieu of foreclosure." Both options usually damage your credit, but lenders can make an exception and not ruin your credit if your payments are current. You must submit a hardship letter and package to the lender that states you're divorcing and unable to refinance or sell the home by traditional means.
No Verbal Contracts
Should you choose to postpone the refinance until you improve your credit, income or other eligibility criteria, or wait until your home's value increases, both parties must agree. Do not make verbal agreements with your ex. Oral "side" agreements don't hold up in court if you or your spouse have a change of heart and want to revert back to the terms of the divorce decree. Furthermore, both spouses should consult their attorneys before changing the divorce decree.
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