Navigating Homeownership and Mortgages During Divorce

At a Glance:

• Divorce settlements typically require either the sale or equity distribution from an existing marital home.
• To avoid complications or frustrations, talking to a mortgage professional early is important.
• You have more options than you think.

Divorce isn’t typically a decision anyone takes lightly, and is more often the culmination of a lot of stress, some struggle, and plenty of emotions (hopefully ending with a sense of relief). During the process, you might feel like the mere thought of purchasing another home outside of your previous marriage is overwhelming and daunting, but with the right knowledge at your disposal, buying a home during a divorce is more like a light at the end of the tunnel — a promise for a fresh future.

 

What Happens to the House During Divorce? There are Three Outcomes

Going through a separation is overwhelming enough without trying to untangle joint ownership of property.

Every divorcing couple with a shared home ultimately chooses one of three paths. Understanding your divorce mortgage options gives you a clear mental anchor so you can make confident, informed decisions for your future.

Here is a quick breakdown of the three main choices:

Option	Best For…	The Bottom Line
1. Sell and Split	A clean break, or when neither person can afford the home alone.	The cleanest financial exit, providing both parties with cash to start over.
2. Refinance and Keep	Keeping kids in their current school, or holding onto a home you love.	Requires the staying spouse to qualify for a new loan based on a single income.
3. Co-Own Temporarily	Waiting for a specific milestone, like kids graduating high school.	High risk. Both spouses remain legally responsible for the shared mortgage debt.

1. Sell the Home and Split the Equity

For many couples, selling a home during divorce is the most practical choice. You list the property, pay off the existing mortgage, cover your real estate agent fees, and divide the remaining profit based on your settlement agreement.

• When it works best: This is the ideal route if neither of you can qualify for a new mortgage on a single income. It also makes sense if you have very little equity in the home or simply want a completely fresh start.
• The benefits: Selling usually offers a clean financial break. It completely severs the joint debt and puts cash in your pocket, which you can use to pay off shared debts or fund a down payment on your next home.
• The challenges: You will both need to navigate the competitive Michigan housing market to find new places to live. You also walk away from your current interest rate.

 

2. One Spouse Refinances and Keeps the Home

If you want to stay in the house, you will need to buy out your ex-spouse’s share of the equity and remove their name from the mortgage.

You do this by refinancing the loan into your name only.

• When it works best: This option is great if you want to provide stability for your children or if you have a strong emotional tie to your Michigan-based neighborhood.
• The benefits: You get to keep your home and avoid the hassle of moving.
• The challenges:Refinancing after divorce means you must qualify for a Conventional Loan or FHA Loan (or similar) using only your individual income, credit score, and debt history. You will likely need a cash-out refinance to pay your ex-spouse their share of the home’s equity, which increases your overall loan balance, and often as a result, your mortgage payment. A local Loan Officer can help you review your budget to ensure this new monthly payment is truly affordable.

 

3. Co-Own Temporarily Post-Divorce

Sometimes, couples decide to keep the house and continue paying the joint mortgage together, even after the divorce is final. One person usually stays in the home while the other moves out.

• When it works best: This is an unusual arrangement, but some families use it to keep kids in the same school district until graduation. It can also be a temporary fix if you are waiting for the housing market to shift before selling.
• The benefits: It delays the stress of moving and avoids immediate refinancing costs.
• The challenges: This option carries large financial risk. Because both names remain on the original loan, both of you are fully responsible for the debt. If your ex-spouse misses a payment, your credit score drops. Furthermore, keeping that large debt on your credit report makes it incredibly difficult for the departing spouse to qualify for a new home loan of their own.

 

How the Equity Buyout Actually Works

If you decide to keep the marital home, you will likely need to pay your ex-spouse for their share of the property, in line with your settlement agreement. This process is called an equity buyout. It is one of the most commondivorce mortgage options, but the math can feel confusing at first. Let us break it down into manageable steps.

 

Calculating Your Home Equity

Before you can buy out your spouse, you need to know exactly how much equity you actually have. The formula is straightforward:

Current Home Value – Current Mortgage Balance = Total Equity

For example, let us say your Michigan home is worth $350,000. You currently owe $200,000 on your shared mortgage.

$350,000 (Value) – $200,000 (Balance) = $150,000 (Total Equity).

If your divorce settlement calls for a 50/50 split, you would owe your ex-spouse $75,000.

This example is for illustrative purposes only. Actual home values, mortgage balances, and equity splits vary based on your specific situation. Contact a Treadstone Loan Officer for a personalized analysis.

 

Funding the Buyout: Rate/Term vs. Cash-Out Refinance

While you could write your ex-spouse a check for their share of the home’s equity, most people do not have tens of thousands of dollars sitting in a checking account. To get the funds for an equity buyout, the spouse keeping the home usually relies on refinancing. However, it is vital to use the correct tool for the job.

• Cash-Out Refinance: This replaces your current mortgage and extracts available equity as a lump sum of cash, which you use to pay your ex-spouse their share. Lenders typically cap this at 80% of your home’s appraised value, and it often carries a slightly higher interest rate.
• Limited Cash-Out Refinance (Divorce Buyout): If you and your ex-spouse have both been on the title for at least 12 months, your buyout may qualify for a Limited Cash-Out Refinance under Fannie Mae guidelines. In this structure, the funds go directly to the departing spouse per your settlement agreement — rather than back to you as cash — which allows for a higher loan-to-value limit and a lower rate than a standard cash-out refinance

Your Treadstone Loan Officer will determine which structure applies to your situation.

 

The 80% Rule: Understanding Loan-to-Value Limits

There is an important limit to keep in mind when planning your buyout. For a standard Cash-Out Refinance, lenders typically cap the loan at 80% of your home’s appraised value — this is your Loan-to-Value (LTV) limit.

However, divorce equity buyouts that qualify as a Limited Cash-Out Refinance may allow access to a higher percentage of your home’s value. Your exact borrowing limit depends on your loan type, credit profile, and how your settlement is structured. If the exact borrowing limit creates a shortfall in paying out your ex-spouse, your divorce attorney and Loan Officer can work together to address the difference through other settlement assets.

 

Michigan Context: Equitable Distribution

Michigan is an equitable distribution state. This means the court divides marital assets fairly, which does not automatically mean a strict 50/50 split. A judge will look at the length of your marriage, individual contributions, and your future economic circumstances. Because the equity split may not be exactly equal, your mortgage plan needs to reflect your actual legal settlement. When your family law attorney and your local Treadstone Loan Officer work closely together, they can often find creative ways to structure your divorce mortgage options to your advantage.

 

What the Divorce Decree Needs to Say About Your Current Home

Before a lender, like Treadstone Funding, can approve your refinancing after divorce, they will need a finalized copy of your divorce settlement agreement. Think of this document as the official playbook for your mortgage. It tells the lender exactly what you and your ex-spouse have agreed to do.

To ensure a smooth divorce decree mortgage approval, your settlement should include specific, clear language about the property. Missing these details can cause delays.

Make sure your legal agreement clearly spells out these four key details:

• Who keeps the house: The decree must explicitly state which spouse is awarded the marital home.
• The exact equity split: It needs to define the specific buyout amount or how the equity will be divided. Lenders need this exact number to structure your new loan.
• The refinancing timeline: Most agreements require the spouse keeping the home to refinance within a specific window, typically 60 to 180 days.
• Release of liability: The document must include language authorizing the release of the departing spouse’s financial liability once the home is refinanced.

Treadstone Funding does not provide legal advice. The information above is general in nature and may not reflect your specific circumstances. Please consult a licensed family law attorney for guidance tailored to your situation.

 

Challenges of Home Buying During Divorce

Buying a home during a divorce comes with its fair share of hurdles, as legal and financial details can quickly complicate the process. Marital assets — like shared savings or an existing home — might still be tied up in negotiations, making it tricky to set aside money for a down payment. Separation agreements can also play a big role, especially if they outline financial responsibilities like spousal support or debt obligations that affect your borrowing power. On top of that, lenders will want a clear picture of your finances before approving a loan. It’s a lot to juggle but working with the right legal and mortgage experts can help you navigate these challenges and find a path to homeownership that feels right for your fresh start.

 

Can You Buy a Home While Separated?

Buying a home while separated isn’t always straightforward, thanks to the legal and financial strings still tying you and your spouse together. In many cases, anything you purchase during this time could still be considered marital property, which might mean your spouse has a claim to it. That’s why some people find it easier to hold off until the divorce is finalized — less hassle, fewer loose ends. But if waiting isn’t an option, having a solid separation agreement and getting guidance from legal and mortgage experts can help you make the process smoother and keep things as stress-free as possible.

 

Joint Mortgages & Divorce

Dividing a joint mortgage during a divorce can feel complicated, especially since the loan won’t automatically adjust to your new circumstances (wouldn’t that be nice?). If one spouse plans to keep the marital home after the divorce is finalized, you’ll need to address whose name is on the current mortgage and how much equity needs to be paid out as part of the settlement. For joint mortgages, there are two common options to release one party from liability: refinancing or assuming the loan.

Refinancing
Refinancing pays off the current loan and replaces it with a new one in the name of the spouse keeping the home. To qualify, the borrower would need to meet the lender’s income and credit requirements. Refinancing also allows the person staying in the home to access equity to pay the other spouse their agreed-upon share.

Mortgage Assumption/Release of Liability
Another option is assuming the existing mortgage, which lets one spouse take over the loan while keeping its original terms, including the interest rate. This process requires approval from the mortgage servicer and confirmation that the remaining borrower can handle the payments on their own. It’s worth noting that servicers often suggest refinancing instead, so using terms like “release of liability” when speaking to them may improve your chances of success. While an assumption avoids refinancing costs, it usually involves a fee and takes 60+ days to complete. However, you won’t be able to access equity through an assumption, meaning you’ll need another way to pay the departing spouse their share.

Until the joint mortgage is resolved, both spouses remain financially responsible — even if only one is living in the home. Handling this early in the divorce process can help prevent lingering financial ties and pave the way for a smoother transition.

A Tip From the Pros
It has been our experience that when clients ask their mortgage servicer to remove a spouse they get told that they need to refinance, but if they request a “release of liability” for themselves or a spouse it often happens. Remember that mortgage servicers make money when a refinance takes place, but do not when a mortgage assumption or “release of liability” happens.

 

Buying a Home After Divorce

Buying a home after a divorce is a big step, but with the right preparation, it’s entirely feasible. Start by focusing on rebuilding your financial stability — creating a budget, saving for a down payment, and cutting down on debt. It’s also crucial to check your credit score and take steps to improve it if needed, like paying off outstanding balances and making timely payments on existing accounts. Once your finances are in a strong place, start shopping around for mortgage options that fit your new situation. Working with a mortgage professional can help you understand what’s realistic and how to position yourself for the best loan terms. It may take time, but with patience and planning, homeownership after divorce can be a fresh and exciting new chapter.

Work With a Mortgage Company That’s On Your Side
When navigating the complexities of home buying during a divorce, it’s important to work with a mortgage company that truly understands your unique situation. At Treadstone, our team of compassionate and knowledgeable agents is here to guide you every step of the way. Our experts take the time to listen, answer your questions, and ensure you’re set up for success in your next chapter of homeownership. Reach out to Treadstone today, and let us help make your transition as smooth as possible.

 

Qualifying for a Mortgage on One Income

The fear of not qualifying for a single income mortgage is often the biggest hurdle for divorcing homeowners. Transitioning from two incomes to one feels daunting. However, qualifying for a mortgage after divorce is entirely possible when you understand exactly what lenders look for. At Treadstone, our team helps Michigan families navigate these exact transitions every single day.

Let us break down exactly how you can qualify on your own, and what options you have if you need a backup plan.

 

How to Use Alimony and Child Support as Income for a Mortgage

If you receive child support or alimony, you might wonder if that money counts toward your mortgage application. The short answer is yes. Lenders can use this money as qualifying income, provided it meets guidelines. To count this income, you must:

• Show that the payments are documented in an official court order.
• Prove you have received the funds consistently for a minimum period, typically three, six, or twelve months depending on the specific loan program.
• Show the payments will continue for at least three more years.

 

What “Qualifying Alone” Actually Looks At

When you apply for a Conventional Loan or FHA Loan on your own, your Loan Officer will review a few core financial metrics to ensure you can comfortably afford the home.

• Credit Score: A strong credit history shows you manage debt well.
• Debt-to-Income (DTI) Ratio: This compares your gross monthly income to your required monthly debt payments. We want to ensure your new mortgage payment fits safely in your new single-income budget.
• Stable Employment: Lenders look for a steady work history, usually covering the last two years.
• Assets: Having cash reserves in the bank strengthens your application.

 

What If You Cannot Qualify Alone Just Yet?

Sometimes the math simply does not line up right away. If you cannot qualify for a mortgage alone right now, you still have excellent options to protect your future.

• Use a Co-Signer: A trusted family member might co-sign the loan, though they must fully understand they are equally responsible for the debt.
• Wait and Rebuild: You might choose to rent temporarily while you pay down shared debt and build a stronger credit score.
• Sell and Downsize: Selling the marital home and splitting the equity gives you cash to buy a smaller, more affordable property in Michigan.

Figuring out your next step starts with a simple conversation. We are here to review your numbers, explain your options, and help you find a clear path forward.

 

FAQs

Does alimony count as income for a mortgage?

Yes, alimony can count as income for a mortgage, but it depends on the lender’s requirements. Generally, lenders will consider alimony as income if it’s consistent and likely to continue for a certain period, typically at least three years. Be prepared to provide documentation, such as a court order or agreement, to verify the payments.

Can you get a loan while going through a divorce?

You can get a loan while going through a divorce, but it can be more challenging. Lenders will look closely at your financial stability, including your income, credit score, and whether your divorce agreement affects your ability to repay the loan.

What mortgage options are there during a divorce?

When it comes to handling an existing mortgage during a divorce, you’ve got two main options: refinancing or assuming the mortgage. With a mortgage assumption, one person takes over the existing loan and keeps its original terms, which can be great if the interest rate is low and the mortgage servicer gives the green light. Refinancing, on the other hand, means replacing the old mortgage with a brand-new one under just one name. This option offers a clean financial break but might come with higher interest rates or extra costs. Both choices have pros and cons, so it’s important to think about what works best for your budget and long-term goals and talk to your lender to learn more about your options.

Is it better to buy a house before or after divorce?

It’s usually better to wait until after a divorce is finalized before buying a house. Purchasing a home during the divorce process can complicate things, as both parties may still have financial ties. Waiting allows for a clearer financial picture and can help avoid potential legal issues or added stress.

Can I be a first-time homebuyer again after divorce?

Yes, you can be a first-time home buyer again after a divorce. The definition of a “first-time home buyer” typically refers to someone who hasn’t owned a home in the last three years, so if your previous home was sold or transferred during the divorce, you may qualify.