Can a Divorce Decree Force a Refinance?
By Beverly Bird
Updated March 30, 2020
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As a general rule, courts – even divorce courts – can't force someone to take on debt. But they can put you in a position in which you must do so to comply with another order. This might be the case if your divorce decree awards you the family home under the terms of an agreement reached with your spouse or because the court ordered it in a property division. You could find yourself in the position of having to refinance to buy your spouse's share of the property.
If you or your spouse intends to keep your home after the divorce, the mortgage on the house presents a problem. The judge won't give the house to one of you and allow the lien or mortgage debt to remain in both names. The spouse who is not keeping the home risks damage to his credit score if the mortgage payments aren't made on time, plus it would affect his debt-to-income ratio if he wanted to qualify for another mortgage after the divorce. In such a situation, the spouse who is keeping the house would inevitably need to refinance to get the other spouse's name removed from the mortgage. A divorce decree can order that one spouse gets the home subject to refinancing, but it can't order that person to take the home if she doesn't want, or isn't able, to refinance.
It's typically not enough to simply refinance an existing mortgage if one spouse is keeping the property as part of the divorce. If you and your spouse bought the home together during your marriage, it's marital property; thus, you both have a right to a share of the equity. You can establish the amount of equity by having the home appraised, then subtracting the amount of the liens from its current appraised value. For example, if the property is worth $300,000 and it's encumbered by a $260,000 mortgage, you've got $40,000 in equity, which is marital property. How the court divides this equity depends on state law. If you live in a community property state, the division will be 50-50. In other states, it comes down to what a judge believes is fair and equitable. This might be a 55-45 split or something even more lopsided. Assuming it's an even split, you would have to refinance the existing mortgage for $280,000, not just the current mortgage amount of $260,000. You'd need an extra $20,000 to buy out your spouse's share of the marital equity.
You can offset assets in your divorce settlement as an alternative to refinancing the existing mortgage plus your spouse's share of the home's equity. For example, if you have $40,000 in an investment account, you can waive your right to half of it, or $20,000. In exchange, your spouse would sign off on his right to half the equity in the marital home. You could then refinance just the amount of the existing mortgage.
Selling the Home
It is possible that neither you nor your spouse will qualify for a refinanced loan on one person's income alone. In this case, a court would order the sale of the property. A judge would not force either of you to take on debt that you can't afford to repay. This would be the equivalent of your divorce decree driving you into bankruptcy. If you and your spouse sell the property, the proceeds after the sale would be divided just as the equity would be if one of you were buying out the other's interests in the property. The proceeds of the sale might be split 50-50 in a community property state, or it could be apportioned more unevenly in other states.
Beverly Bird is a practicing paralegal who has been writing professionally on legal subjects for over 30 years. She specializes in family law and estate law and has mediated family custody issues.