Divorce and Your Mortgage: What Washington Homeowners Need to Know

Going through a divorce or dissolution of a domestic partnership is one of the most stressful experiences a person can face. In the middle of everything else — attorneys, finances, emotions — your mortgage may feel like a detail you’ll deal with later. But how you handle the mortgage during and after a divorce can have lasting consequences for your credit, your finances, and your ability to buy a new home.

Here’s what Washington homeowners need to know.

The Most Important Thing to Understand: Your Divorce Decree Doesn’t Override Your Mortgage

This is the single most critical point, and it surprises many people going through a divorce.

A divorce decree or separation agreement can specify who is responsible for making mortgage payments — but it does not remove anyone’s name from the mortgage or eliminate their liability to the lender. If your ex-spouse is awarded the home and is supposed to make the payments, but your name is still on the mortgage, you are still legally responsible for that debt.

If your ex loses their job five years from now and stops making payments, your credit will be damaged — even if a judge said the house was theirs. If the property is foreclosed, that foreclosure appears on your credit report too. The only way to remove your liability from a mortgage is to refinance the loan into one person’s name — or sell the property.

A friend of mine went through exactly this situation. Her ex really wanted to keep the house but couldn’t qualify for a mortgage on his income alone. He wasn’t happy when she insisted he refinance to remove her name. It was a tough call, but they ultimately sold the home and split the proceeds. He later remarried, bought a new home, and eventually filed for bankruptcy — the home was foreclosed. Had her name still been on that mortgage, her credit would have been severely damaged and buying a home of her own would have been nearly impossible.

Refinancing to Buy Out an Ex-Spouse

If one spouse wants to keep the home, the standard approach is a refinance — the remaining spouse takes out a new mortgage in their name alone, pays off the existing joint mortgage, and provides the departing spouse their share of the equity.

Here’s where there’s an important benefit most people don’t know about: lenders will treat this transaction as a rate-and-term (limited cash-out) refinance rather than a standard cash-out refinance — even though equity is being paid to the departing spouse. This means better pricing and potentially a higher allowable loan amount.

To qualify for this exception, the following is required:

• Both parties must have jointly owned the home for at least 12 months
• A copy of the filed separation agreement or divorce decree — it must include the property address, the amount of proceeds, and that the proceeds are from refinancing
• A copy of the filed support order or parenting plan, if there are minor children
• Either a deed prepared by an attorney to transfer title, or the departing spouse must sign the note and deed of trust if remaining on title temporarily
• The spouse retaining the property must qualify for the new mortgage on their own

One important note: the spouse retaining the property cannot receive any proceeds from the refinance for this exception to apply. The funds go directly from escrow to the departing spouse at closing.

What If the Home Has an FHA, VA, or USDA Loan?

If your existing mortgage is an FHA, VA, or USDA loan, there may be an alternative to refinancing worth exploring: a loan assumption.

A loan assumption allows the spouse keeping the home to take over the existing mortgage — keeping the original interest rate, loan balance, and terms intact. In today’s rate environment, this can be a significant financial advantage. If your current mortgage is at 3% or 4% and market rates are considerably higher, assuming the loan instead of refinancing could save hundreds of dollars a month.

How It Works

The spouse retaining the home applies to the lender to formally assume the loan. The lender reviews their credit and income to confirm they can qualify on their own. If approved, the assuming spouse takes over sole responsibility for the mortgage.

One important limitation: assumptions do not allow cash out. This means if your ex-spouse needs to be paid their share of the equity as part of the settlement, a loan assumption won’t accomplish that on its own. You would need to arrange the buyout separately — through savings, a HELOC, or other means — or a refinance may be the better path.

VA Loan Assumptions: A Special Consideration

VA loans are assumable, but there’s a complication worth understanding. If the spouse assuming the loan is not a veteran, the original borrower’s VA entitlement remains tied to the loan until it is paid off in full. This can limit the veteran’s ability to use their VA benefit to purchase a new home. If you have a VA loan and are going through a divorce, it’s worth discussing entitlement implications with a VA-approved lender before deciding on assumption versus refinancing.

What About Conventional Loans?

Most conventional loans include a due-on-sale clause that would normally require the loan to be paid off when ownership transfers — ruling out assumption. However, the Garn-St. Germain Depository Institutions Act of 1982 prohibits lenders from enforcing that clause when property is transferred to a spouse as part of a divorce decree or separation agreement.

There’s an important distinction here, though: a title transfer under Garn-St. Germain is not the same as a qualifying assumption. If the title transfers but no formal assumption is completed, both spouses typically remain legally obligated on the mortgage. To fully remove the departing spouse from liability, a lender-approved qualifying assumption or a refinance is still required.

The Bottom Line on Assumptions

A loan assumption may be worth exploring if:

• Your existing mortgage is FHA, VA, or USDA
• The current interest rate on the loan is meaningfully lower than today’s market rates
• The spouse keeping the home can qualify for the mortgage on their own
• The departing spouse does not need a cash buyout from the home’s equity (or the buyout can be handled separately)

As with refinancing, the spouse retaining the home must demonstrate they can qualify independently — the same income, credit, and debt-to-income standards apply. And just as with a refinance, lender approval is required.

If you’re unsure whether your loan is assumable or whether assumption makes sense for your situation, I’m happy to walk through it with you.

What If You Can’t Qualify for the Mortgage Alone?

This is one of the most common and difficult situations in divorce refinancing. If the departing spouse’s income was needed to qualify for the original mortgage, the remaining spouse may not qualify on their own.

Options to explore:

• Alimony and child support as income: If you will be receiving alimony or child support, it can be counted as qualifying income — provided it will continue for at least 36 months after the refinance closes and is documented with the court order and evidence of receipt
• Alimony you are paying on an FHA loan may be treated as a reduction from your gross income rather than a monthly debt obligation — which can meaningfully improve your qualifying ratios. See Qualifying for a Mortgage When You Pay Alimony for details.
• Paying down the balance: Reducing the loan amount may bring the payment within qualifying range
• Selling the home: If neither party can qualify alone and neither can afford the payment, selling and splitting the proceeds is often the cleanest solution — and may protect both parties’ credit
• Non-QM or alternative documentation loans: In some cases, a non-QM loan may provide options when standard qualifying doesn’t work

If your ex cannot qualify to refinance the home into their name alone, that is worth serious consideration. A mortgage payment they can’t afford today is a foreclosure risk tomorrow — with your name still attached.

Buying a New Home After Divorce

If you’re the spouse leaving the home and want to buy a new primary residence, there are a few things to know:

• The old mortgage still counts against your DTI until the refinance closes and is reflected on your credit report. If the refinance hasn’t happened yet, lenders will include that payment in your debt-to-income calculation for the new loan
• Alimony or child support you are paying will count as a monthly debt obligation, reducing your buying power
• Alimony or child support you are receiving can be counted as income if it will continue for at least 36 months
• Down payment funds: Your share of equity from the home sale or buyout can typically be used for the down payment on a new home, properly documented

Protecting Your Credit During and After Divorce

While the mortgage is being sorted out, your credit is still at risk from joint accounts. Steps to take as soon as possible:

• Pull your credit report at annualcreditreport.com and review all joint accounts
• Close unused joint accounts immediately — even if your ex promises to pay, their balance utilization affects your score
• Remove your name from accounts where you are an authorized signer
• Open accounts in your own name to begin establishing independent credit history
• Monitor regularly — if your name remains on any account, late payments or high balances will impact your score

On a joint credit card, even if your ex pays on time, if the balance exceeds 30% of the credit limit, your score will be affected. Closing or separating joint accounts protects you regardless of your ex’s financial behavior.

Work with an Attorney — and a Mortgage Professional — Early

I’m not an attorney and this is not legal advice. If you are going through a divorce, working with an attorney who specializes in family law is essential — the language in your separation agreement or divorce decree directly affects what options are available on the mortgage.

What I can do is help you understand the mortgage side of the equation early in the process — before the decree is finalized. The terms of how the home is handled in the decree affect your refinancing options, so it’s worth having a mortgage professional review the situation while there’s still flexibility to structure the agreement in a way that works.

If you’re going through a divorce and own a home in Washington State, I’m happy to walk through your options confidentially — no obligation.

Let’s Talk

Rhonda Porter is a Licensed Mortgage Advisor (NMLS #121324) at New American Funding (NMLS #6606), serving homeowners throughout Washington State.