Divorcing in California means everything is split down the middle, including all assets, debts, and the mortgage. If a single person decides to remain in the home, there are a few routes they may take to be able to keep living in their home. Here’s where you can find out how to separate your divorce from your mortgage, saving you thousands!
Sell or save the home
One of the biggest decisions after divorcing is whether or not to sell the house. This could be a way to get rid of your home and mortgage without having to worry about it, but this process generally isn’t quick. If the couple decides to sell the home, calling a realtor to assess your home would be the first step. However, if the couple decides that one of them will be staying in the home, there are a few crucial steps they must take. It’s important that the spouse keeping the home may be able to pay the bills for the home. The long term effects of holding onto the home and paying the full mortgage should be made clear to the spouse wanting to own the home.
One option is being able to pay off the other spouse. This may be difficult, as to buy out a portion of a mortgage most people would need to take out a loan. For example, let’s say a home is worth $400,000, the couple owes $200,000 on the mortgage, and have a $100,000 equity. To be able to buy out the other couple’s share, the spouse wanting the home would need to pay out $50,000. Many people don’t have this kind of money laying around when divorcing, so they must take out a loan.
Refinancing the mortgage
An easy and quick way to be able to gain hold of a home is refinancing the mortgage. This is when a single person would be in charge of the mortgage while taking the other spouse’s name off. The spouse who has signed the mortgage agreement would be in charge of paying the monthly payments. To be able to refinance a mortgage, the spouse’s income, credit, and equity would be assessed. If they do not have the proper income amount to be able to refinance the home, the bank would deny the refinance.
There is another option rather than refinancing the mortgage, such as removing one of the spouse’s name. If the couple has purchased or financed the home with an FHA loan, they are permitted to remove their spouse. The caveat to this is that the spouse wanting to remove a name must prove that they have been paying the mortgage consecutively for the last 6 months. If a spouse happens to be a veteran, they may use the VA streamline refinance solution. In most cases, the veteran must stay on the loan.
What are the tax implications of refinancing a home?
Whether a person sells or refinances their home, the government will always get their share. Under current law, home sellers would need to pay taxes on the capital gain (profit) off of the property sold. For example, a home that was purchased for $300,000 was sold for $450,000. The sellers would need to pay taxes on the $150,000 made. On the opposite end, if the $300,000 house was sold for $299,999; no taxes would need to be paid. There could be up to a 20% tax rate on homes sold for capital gain.
The owner of the house would need to see if the home they want to keep has depreciated. Refinancing a run-down old home is never a good idea, and most banks would not want to do that. If the home has depreciated in value since the time of purchase, then it’s probably a good idea to not refinance the home and just sell it.
If a spouse decides to refinance a home, they have to think about the alimony, child support, and new mortgage payments. They have to decide and see if they have handled all of these payments and a more expensive mortgage now. It’s important to remember that alimony payments are not tax-deducible for the higher-earning spouse, but the spouse receiving the alimony does not need to declare the payments. This means that the person paying the payments still have to pay taxes on the money they’re sending out, but the person receiving it doesn’t need to pay any taxes on it.
Contact Pride Legal
If you or a loved one has been thinking about divorce, we invite you to contact us at Pride Legal for legal counseling or any further questions. To protect your rights, hire someone who understands them.