Dealing with the Home as Part of a Divorce
Getting a divorce is typically a stressful and traumatizing time. Because of the financial implications, the experience can become even much more stressful. There are a multitude of financial issues to deal with during a divorce, from making sure each party can afford to live on their own to the division of marital assets.
In this article we will be dealing with just one important financial issue – the disposition of the couple’s home. Though this is not an isolated issue, it is a very significant concern and it will be connected to many other financial considerations that must be dealt with during a divorce. It is important to address these issues up-front and the majority of these concerns should be specified in the formal Settlement Agreement*. What follows is a discussion of some of the important factors which must be addressed with regard to a divorcing couple’s home.
What is the desired disposition of the home?
There are basically three things that can be done with a home after a divorce:
• The home could be sold and the proceeds split, assuming that there is positive equity in the home;
• One spouse could live in the home – either by gaining ownership or possibly a continuance of joint ownership;
• In a less likely scenario, the home could be leased.
Selling the home
The most straightforward scenario is to sell the home and divide the proceeds. For example, in this case the mortgage is paid off and there is no worry of future joint liability. Generally this process is cleaner than having one spouse buy out the other, however it should be noted that there are potential complications which can arise during the sale of a home and couples should be prepared to work on solving these issues when they arise during the sales process.
One very important consideration is the selection of a Realtor®. It is important to select a real estate agent that is used to dealing with divorce situations as the agent many times will work as an intermediary not only between the selling agent and the seller, but also between two spouses that are likely not to see eye-to-eye on every decision — from the sales price to improvements which must be made in order to make the home saleable.
Of course, if the sales price is below the amount of the mortgage, a condition known as negative equity, this makes the process much more complex because it is likely that the couple must bring money to settlement. There is also the possibility of accomplishing a short sale in which the bank accepts a lower mortgage payoff. As attractive as that scenario sounds, one must remember that a short sale will affect each spouse’s credit in the future, including their ability to purchase another home.
One spouse could be the purchaser
In another scenario, one spouse could purchase the home from the other. This could be accomplished by refinancing the current mortgage and removing the spouse from the loan and title to the property. If there is positive equity, a cash payment may be required from one spouse to the other. A “cash-out” refinance could provide the capital necessary by increasing the loan amount, or the assets may come from other marital assets.
Of course, the alternative of refinancing assumes that the spouse purchasing the home can afford and qualify for a new mortgage on their own – and the mortgage payment may rise if the loan amount is increased to generate cash during the refinance. Working with a mortgage and financial advisor, it is important to assess budgetary constraints as well as the limits to qualification. Speaking of qualifying, this brings up two issues:
• The purchasing spouse might be using child support and/or alimony as income to help qualify (for the new loan) and it is important that the Separation Agreement is finalized (signed by both parties) and a precise history of these payments can be tracked. Typically, the lender will need to verify that at least six payments have been received by the lender in order to utilize the income to qualify.
• In some situations, the purchasing spouse may not have enough credit in their name to qualify for a mortgage, even if the income is sufficient. Therefore, it is important that any divorcing spouse in this situation establish credit lines early in the separation/divorce process.
It should also be noted that the time line for closing on a refinance can range from 30 to 60 days. If there are qualification issues, this timeline could be extended significantly, for example, to allow for the tracking of child support and/or alimony payments. Therefore, the Separation Agreement might have to address the financial arrangements of a temporary living situation before the permanent solution is implemented.
Keeping the present mortgage
Perhaps the spouse remaining in the home can’t qualify for a new mortgage. In this case, the Separation Agreement must determine which party will be responsible for making the payments. The concern with this scenario is that the mortgage and ownership of the property officially must remain in both names. Thus, if the spouse is responsible for making the payments, but does not do so on a timely basis, this will adversely affect the credit of the other spouse. This is why it is important that all credit and bank accounts are clearly separated in a divorce. For example, if one spouse tries to purchase another home, they may find that debts run up by their ex-spouse may affect their own qualification.
Leasing a home
As indicated earlier, leasing the home is not a likely scenario. However, it may occur in a situation where the divorced couple leaves the area and the home is in a negative equity situation. Because refinancing is also not likely, joint ownership would continue and the spouses would have to become “joint” landlords, not a preferable situation in most divorce situations.
In summary, the disposition of a home during a divorce can be a very complex situation which requires careful consideration of the options and serious planning. Here is a synopsis of the important rules to follow…
• Make a quick and decisive decision regarding the disposition of a home after consulting with legal, financial, mortgage and real estate advisors.
• Integrate these decisions specifically within the legal Separation Agreement.
• If selling a home, employ a real estate agent experienced in working with divorcing couples.
• If selling or refinancing a home, make sure your mortgage advisor understands all of the ramifications of the disposition plan. This includes making sure that any plan to refinance the home or purchase a home includes requalification of the party(s).
• Do make sure that all assets and liabilities are separated so that the divorced spouses are less likely to be hampered as they purchase real estate or obtain credit in the future.
• If a spouse does not have sufficient credit in their name, steps must be taken to establish credit lines early in the separation/divorce process.
• Make sure all child support and alimony payments are tracked precisely and fastidious records are kept in case they are needed for qualification.
*A Separation Agreement may also be known as a Property Settlement Agreement (PSA), Divorce Agreement or Property Settlement in various jurisdictions.