Bad Credit Mortgage Refinance Options After A Divorce
The average mortgage term is 25-years…“Statistics show 42 per cent of marriages end in divorce, and 34 per cent of married couples divorce before their 20th wedding anniversary.” ~ Elsa Vulliamy ~ The Independent
To put it another way – about a third of marriages end before the mortgage is repaid. In many cases, the mortgages are held jointly and when that happens, there’s a financial link. It’s on your credit report, and even if you’ve never paid a bill late in your life and your ex-partner has, it’s going to impact on your creditworthiness.
What You Should Know About Refinancing After Divorce
Married couples have equal rights to the family home. It doesn’t matter whose name is on the property Title Deeds. If you’re worried that your ex-partner could sell your home from under you because your name isn’t registered on the Title Deeds of the property, you can register a Home Rights Notice. It gives you the legal right to live in the property during the divorce proceedings.
Where this can be challenging is when your partner was the sole property owner before you married, in which case you’ll need to get independent legal advice to find out exactly what actions you can take, if any.
How to Remove a Name from a Mortgage without Refinancing
The only way to have a name removed from a mortgage without refinancing is to contact your existing lender. They may approve, or they could decline. The one thing they’re interested in is your ability to repay the finance they’ve loaned you and secured against your home. Whose name is on the Title Deeds is irrelevant to them? A lender’s main interest with the Title Deeds is having them recorded as having a loan secured against the property.
What you need to ask your existing lender for is either a Transfer of Equity or a Change of Borrower. They both do the same thing. Either term can be used by a lender. Using this, you can either remove a name from the mortgage or add another joint name to it. Your lender isn’t required to approve the change though. In order to move from a joint mortgage policy onto a sole mortgage, you will be required to meet the affordability criteria.
Should you be applying to alter the names on a joint mortgage either before or during divorce proceedings, it’s worthwhile discussing your situation with your lender as they may provide a repayment holiday (temporarily) until you get finances sorted and make final arrangements for the repayment of the mortgage.
Divorce Refinance: Quit Claim Deed Alternative for UK Residents
One of the largest Q & A websites for professional advice online is JustAnswer.co.uk. The problem is their HQ is in the U.S so there’s conflicting information. The term Quitclaim Deed or often mistakenly spelt as Quit Claim Deed is something that’s asked about a lot. A Quitclaim is not something you can do in the UK.
There is an alternative to it and that’s to use the Land Registry TR1 form and then follow that up with the Land Registry AP1 form.
Information and video guidance on completing the forms are available here.
You can choose to file the forms yourself, or take legal advice and have a conveyancing solicitor handle this for you. Whichever way you approach it, there’s going to be fees involved.
When these forms are relevant during a separation is when one person named on the joint mortgage states they want no financial interest in the property. Instead of taking it as a goodwill gesture (as in you can keep their equity portion), which can later be retracted if the name remains on the Title Deeds, even though it’s removed from the mortgage, form TR1 is for a transfer of ownership and can essentially be used for your ex-partner to gift their equity in the property to your sole name without any money exchanging hands. Apart from the fees involved to execute the transfer.
Where mortgages are involved though, you will in all likelihood need the consent of your current mortgage provider to alter the Title Deeds, especially if they’re resisting changing your mortgage from a joint one to a sole proprietor.
How do I Refinance after Divorce with Bad Credit?
The first thing you should check is your credit report to understand why you’re affected with bad credit. If your ex-partner’s name is still on the mortgage, or on the Title Deeds, then it’s likely the Credit Reference Agencies has him or her listed as being financially associated with you. That would mean that if they have adverse credit, your credit will be affected the same, even though it isn’t your credit. Your ex-partner’s bad credit can affect you.
What you would need to do in this case is to contact each of the three credit reference agencies and find out how to remove the financial association.
To be able to do that, both people must not have lived at the same address for the previous six months. It should also be noted that ALL joint credit agreements should be settled before you’ll be disassociated. The reason is that any joint credit and finance agreements are jointly liable, and therefore if there are previous joint credit agreements that remain outstanding, technically there is still a financial association.
In the case of joint debts, a fairly common assumption is that half the debt is owed by each person. As an example, a £2,000 finance agreement is assumed to be owed at £1,000 each. That’s not the case. Both people named on any joint finance agreement are equally liable for the full portion of the debt. Not partial, therefore if your ex-partner is failing to keep up their repayments on accounts that you’re linked to as a joint applicant and account holder, you will be responsible for keeping up those repayments.
When you want to financially disassociate yourself completely, revise all your credit agreements. Each account that’s held in both names should be settled and closed. Handle the debts as though they’re your own and contact each company to explain the situation and make repayment arrangements. Some will be more than happy to alter the repayments or provide interest breaks while you sort your finances out.
It may be that the debts are too high to manage on your own, in which case, if it’s not amicable to make arrangements with your ex-partner, there are debt charities that can provide assistance through Debt Management Plans and similar repayment plans.
The following is an excerpt from our Credit Repair Page,
Resources that can help you get back on track:
What will be really difficult to do is refinance your home before addressing the bad debts that show on your credit report as being in default status. It doesn’t matter if the debts are in your sole name or you’re named as a joint credit holder. The debt is counted as yours since you’ve agreed to the repayments.
How Do I Get My Name Off the Mortgage After Divorce?
If the person who wants to stay in the property doesn’t earn enough to satisfy the affordability assessment, it’s likely the transfer of equity will be refused, in which case your name can remain on the mortgage. The lender doesn’t have to alter the terms of the mortgage.
An alternative is for the person living in the property to remortgage the home under their name with your name no longer tied to it. The process for removing a spouse from a mortgage after divorce is either through a Transfer of Equity, and if that isn’t acceptable by the lender, then remortgaging is another approach that could be taken, or the other option is…
A Joint Borrower Sole Proprietor Mortgage
A guarantor mortgage is the closest description you get to this type of financial product, but there’s one key difference. Two incomes can be used for the affordability criteria, meaning a sole applicant could apply using their parent’s salary, a brother or sister’s income, or the income of another family member. Perhaps you could ask a good friend too, and use their income to add to his/her own to bring the income multiple up to the affordability criteria used by the mortgage lender.
With a Joint Borrower Sole Proprietor mortgage, the dual-income is used, but only the person living in the property is on the Title Deeds. That’s the sole proprietor element. There are not many lenders that offer these though and the ones who do will use manual underwriting, so you are going to need a specialist lender.
In the case of couples divorcing, this is an option to consider if you’re refinancing and your ex-partner doesn’t want anything to do with the property. They may insist on a cash lump sum where they’ll be paid the equity they have in the home. If without their income, your existing lender refuses the mortgage application based on not being able to meet the requirements of affordability, recourse is to refinance after a divorce using someone else’s income.
The drawbacks can be huge though because the person supporting the mortgage application as a joint borrower is liable for the mortgage repayments if you can’t pay. As they would be a non-legal owner of the property, they will be unable to force a sale to repay the mortgage. Should the worst happen and you can’t afford the repayments, it’s the joint borrower who would be equally liable. And if they have other assets, such as the person is an existing homeowner, the non-legal status to your home, maybe putting their own home at risk.
A Deed of Trust / Declaration of Trust Should be considered
It is possible for someone who is not a legal owner of a property to have their rights protected to the financial interests of the same property, despite not being on the Title Deeds.
Mortgage terms often run for longer than some marriages do, so it’s imperative that legal advice is taken before setting up a Declaration of Trust.
What you’re specifically looking for when arranging a Joint Borrower Sole Proprietor Mortgage is to register a beneficial interest for the joint borrower with the Land Registry. While it won’t alter the Title Deeds, it will extend legal protection to the joint borrower.
Should You Refinance Before Divorce or After the Divorce is settled?
Dual income couples are in a position to borrow more based on both incomes. If you plan on taking this route before the divorce is finalised, it’s imperative to get financial advice. Especially if you arrange a joint mortgage knowing your circumstances are going to change in the near future. As outlined above, there are other routes you can take to refinance, and in the cases where your income would not permit you to borrow the amount you need, you would need to consider getting someone else to become what’s essentially a guarantor.
It should be noted that while a Transfer of Equity can get a name removed from your mortgage, it can also be used to add a name to the mortgage, so you could potentially keep the deal you have and amend the names on the mortgage. That could work in your favour if perhaps you could use your parent’s salary to bump up your income for affordability. It’s worth discussing this option with your current lender as they could work with you to make suitable adaptations to your existing mortgage.
In the case of bad credit refinancing, it’s going to be imperative that you check into your credit reports. The reason is that all the debts accrued under joint credit agreements that remain in default will consistently damage your credit rating until they’re settled in full, or put into a Debt Management Plan.
When joint credit finance is hindering your ability to access credit, you can approach each credit reference agency to have a financial disassociation filed. Whether that’s accepted or not will depend on the joint credit agreements that remain outstanding.
EQUITY RELEASE OPTIONS: