Should I Apply for a Mortgage Modification Before or After Divorce?

When married couples buy a home, they often jointly take out the mortgage loan. In this scenario, both spouses sign the promissory note and the mortgage (or deed of trust in some places) and are legally responsible for repaying the loan. If the couple later divorces, the issue of what will happen to the property and the responsibility for the house payments can get complicated.

If one spouse keeps the home and the other moves out, this new arrangement doesn't affect the loan contract. Both spouses are still liable to repay the debt as far as the lender is concerned. In most cases, the lender won't remove a spouse from the loan documents to relieve them from the responsibility of paying the loan simply because the couple isn't married anymore.

But it is possible to remove one spouse from the loan contract and eliminate that spouse's legal responsibility to repay the debt, like by:

• refinancing the loan
• having the spouse who keeps the home assume the loan, or
• getting a loan modification.

If you decide to go the modification route, the next question is: When is the best time to apply to modify the mortgage? Before or after the divorce is final? Getting a loan modification while going through a divorce can be tricky. You'll need to get your timing right and ensure all your ducks are in a row.

How Loan Modifications Work

A "loan modification" is a change to your existing loan terms. The goal of a modification is to make your monthly payment more affordable. Modifications typically involve:

• an interest rate reduction (or converting a variable interest rate to a fixed interest rate)
• a capitalization of specific amounts (which means adding any amounts to the total balance of the loan), and
• extending the loan term, for example, from 30 to 40 years.

Applying for a Mortgage Modification Before Your Divorce is Final

If one of the divorcing spouses wants to keep the home, applying for a modification while the divorce is pending is possible. But if both spouses signed the original loan documents, then both spouses will usually have to sign the modification documents.

So, both spouses will remain responsible for repaying the loan. If one spouse doesn't agree, this refusal can kill the deal.

Reasons Not to Sign a New Loan With Your Soon-to-Be Ex

Even if divorcing spouses agree to complete a loan modification and jointly sign the documents, this tactic isn't a good idea—particularly if you're moving out of the home and expect your ex-spouse to make the payments. Here's why.

You'll be on the hook for many years. Once you sign a loan modification, you're obligated to repay the modified loan. The loan will most likely be around for 30 or 40 years. If your ex-spouse doesn't make the payments, the lender will likely look to you for the money, even if it's years later.

Your credit could take a hit. In addition, you're putting your credit on the line by signing the loan modification paperwork. Your credit will take a major hit if your ex-spouse falls behind on the payments.

Applying for a Modification After Your Divorce is Final

Once a divorce is finalized, and one spouse is awarded the home, that spouse can solely apply for a mortgage modification. The other spouse will be released from liability on the loan, and their signature won't be needed on the modification documents.

Of course, getting a loan modified this way is subject to the terms in the final divorce decree. Sometimes, a divorce decree will require the spouse keeping the home to refinance the loan instead.

Reasons to Apply After a Divorce

The best way to handle the modification if you're getting divorced is to apply once the divorce is final. Here's why.

The spouse without the house won't be on the hook for the loan. If one spouse modifies the mortgage in their name, the other spouse won't be liable for the loan.

Easier to qualify for a modification. It might be easier for the spouse keeping the home to qualify for a modification after a divorce is final. One of the eligibility requirements for getting a loan modification is that you must be facing a long-term inability to make your current mortgage payments, referred to as a "financial hardship." Most lenders accept divorce as a valid financial hardship.

Also, generally speaking, the higher your debt load is in relation to your income, the easier it is to qualify for a modification (assuming it's not too high). Because you'll have to rely on just your income to pay the mortgage loan and other household debts after a divorce, you'll have an increased debt burden. So, you might have a better chance of getting a modification.

You Must Still Meet the Qualification Criteria

But remember that you still must have sufficient income to support a modified payment. Too much debt and too little income will significantly hurt your chances of getting the loan modified.

When to Seek Counsel

If you're having difficulty figuring out when and whether you should apply for a modification, consult a qualified attorney who can inform you about options and help facilitate the transaction.