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Is refinancing a must after a divorce?

On Behalf of | Mar 14, 2023 | Divorce

There are a lot of serious questions California residents have to answer in the aftermath of the divorce. Many of these questions pertain to issues of financial and property distribution. For example, does a person have to refinance after a divorce?

Divorce and refinancing

Refinancing following a divorce is not a requirement. However, divorcing individuals may not be able to afford their home, so they may opt to sell it. Some lenders let the partner keeping the home assume full responsibility for the mortgage. This frees the other partner from financial obligation.

Options for handling a house after divorce

Divorcing couples may agree to own a home jointly. One partner, often the one with primary custody of the children, lives in the house.

In other circumstances, a home is quiet claimed. This is where one spouse lives in the home and is responsible for the mortgage. The other partner’s name stays on the mortgage, but they don’t live in the house and have a verbal agreement freeing them from financial responsibility. This can be financially dangerous for the departing spouse.

The benefits of post-divorce refinancing

Refinancing is often a good solution, as a new mortgage can produce sufficient cash to cover the leaving spouse’s equity. However, this is not always a perfect option in every divorce. In order to refinance, the spouse who keeps the home will have to meet certain financial qualifications, including:

  • A credit score of 620 or higher
  • A loan-to-value ratio of 97%
  • A max debt-to-income ratio of 43%

After the divorce, the spouse who wants to stay might not meet the mortgage financial requirements on his or her own. The situation is more challenging if the couple has debts that were divided during the divorce.

Refinancing after divorce can provide financial closure for both parties. It should only be done after carefully evaluating the pros and cons and the effect on the divorcing spouses’ financial situation.