Going through a divorce is a life-altering change that often leads to emotional stress as you and your spouse grieve the end of a marriage. Furthermore, financial anxiety can transpire when you and your spouse have to make significant decisions about the division of assets and liabilities. Apart from bank accounts, retirement accounts, and personal property, the most challenging asset to divide is often the most financially significant, the family home.
Mortgage options for the marital home
Deciding what to do with the marital home and mortgage comes down to factors such as how much equity is in the home, who purchased the home, the type of mortgage loan used to finance the home purchase, or if one spouse wants to keep the home. We’ll explore each option in detail so you and your spouse can make an informed decision with your attorneys that will benefit each individual’s and the family’s needs.
Refinance the current mortgage
One spouse may want to keep the marital home if you have school-age children to lessen their stress of moving to another home, particularly if it’s in another school district. The spouse who qualifies to refinance the existing mortgage will have complete responsibility for making the monthly mortgage payments. The other spouse will need to be removed from the title to remove their claim to the home.
To determine if the sole spouse can qualify for a mortgage refinance, the mortgage lender will review their personal financial situation to determine if they can support a mortgage on their own. The new mortgage terms will depend on current income, credit score, debt-to-income (DTI) ratio, and the current market conditions. The debts solely assumed after the divorce, such as student loans, car loans, and credit card payments, will likely impact the borrower’s debt-to-income ratio.
Qualified income for a refinance can be obtained from a job, alimony, child support, or a combination of these income sources. To be considered as qualified income, alimony and/or child support payments must have been received consistently and on time for the last six months. These payments must continue for at least another 36 months after applying for the mortgage, depending on the type of mortgage. The mortgage lender will request to see the signed Separation Agreement or Divorce Settlement Agreement and your former spouse’s bank statements showing the deposits.
If child support is one of the income sources, the mortgage lender will also want to see your children’s birth certificates to verify they will not reach the age of emancipation (18 or 21, depending on the state where the divorce is filed) during the 36-month period. If they will age out, child support payments for that child will not count as a source of income.
Assume the current mortgage
If one spouse decides to keep the marital home with the current mortgage terms, they may be able to assume the existing mortgage. Similar to refinancing, the other spouse’s name will be removed from the mortgage and released from liability once you qualify for the mortgage on your own. The benefit of this option is that the mortgage rate and monthly mortgage payment remain the same, and the cost to assume a mortgage is usually less than a refinance.
To consider if this is a viable option, you must confirm with the mortgage servicer that your current mortgage is assumable. USDA, FHA, and VA loans can be assumable if you meet specific requirements, but this is not an option with conventional mortgages.
Buy the spouse’s share of the home equity
If the marital home is paid off or has built sufficient equity and the court splits the home equity between both parties, the spouse who would like to keep the marital home but can buy out the other’s share of the home equity with a home equity line of credit (HELOC). A HELOC is like a second mortgage where you can borrow cash from the home’s equity to buy out your spouse. The spouse who selects this option would be responsible for making the monthly HELOC payment and the current monthly mortgage payment if the home still had a first mortgage.
Alternatively, a cash-out refinance can provide the funds to acquire the other spouse’s share of the home equity.
Sell the home
If neither party wants to keep the marital home, the property can be sold, and each person takes their share of the proceeds to buy or rent separate dwellings. It is recommended to list the home for sale with a real estate agent who specializes in divorce real estate as they can also work directly with the divorce attorneys if one of the parties is not cooperating with the sale. Ask your loan officer or attorney to recommend an agent if family or friends are unable to provide a local referral.
As both parties must agree on the sale price of the home, your real estate agent can help find a real estate appraiser to determine the home’s fair market value. Prior to the sale, it is essential to decide who will be responsible for maintaining the home and keeping it clean for showings. Depending on the local housing market, you should also determine whether you will accept a lower price to get a quick sale or wait for a full price offer. The presence of a real estate agent who has experience working with divorced couples can help both parties respond to these questions so the process can move smoothly.
Keep the home and current mortgage loan
If neither party wants to sell and one party is unable to refinance the home independently, the fifth option is to keep the home and continue to pay the current mortgage. The Divorce Agreement will need to specify who will be responsible for making the monthly mortgage payments. Whether each party contributes 50% of the payment or another ratio, the mortgage servicer considers both parties liable for the payment. If your former spouse misses a payment and you are not able to cover the missed payment, your credit score is at risk.
Of the five options discussed, this option is probably the riskiest. Leaving the non-resident’s name on the mortgage may negatively impact their ability to buy another home while they remain on the current mortgage. The debt associated with the existing loan will be calculated into each party’s debt-to-income ratio. It could prevent the non-residing spouse from qualifying for a new mortgage loan.
Preparing for a financially stable future
It’s not uncommon for both spouses’ finances to take a hit after divorce as the same cumulative income now must support two households instead of one. It’s important to be proactive early to prepare financially and emotionally for your post-divorce financial future.
Protect your credit health
As soon as the divorce is filed, it is essential to obtain your individual credit score and credit report. This will provide a starting number and a complete understanding of your personal and joint financial obligations. Until all joint accounts are paid off and closed and assets, like the marital home, are sold, it is important to monitor your credit report closely.
In preparation for your new financial life, make a list of all assets and debts individually and jointly held. Your credit report will help to identify your personal and joint obligations.
While some accounts, such as banking and investment accounts, and car, personal, and student loans, will likely appear on the credit report, other documents such as retirement accounts, children’s college savings accounts, airline miles, tax returns, pay slips, utility bills, may prove challenging to obtain if you did not actively manage the household’s finances.
Track purchases and expenses
To help your attorney decide how to split up the marital assets and debts, and determine who should pay or receive spousal support, it’s important to start tracking fixed expenses, such as mortgage payments, utilities, groceries, childcare, education, transportation, and flexible purchases such as clothes, entertainment, and vacations. Putting a number to these monthly and annual expenditures can also provide a reality check on whether you can afford to keep and refinance the marital home, buy a less expensive new home, or temporarily rent while you learn to live on one income.
Preparing for a mortgage application
If you end up with a larger-than-expected portion of the marital debt, it will lower your debt-to-income (DTI) ratio. A higher DTI ratio can impact your ability to qualify for a mortgage to refinance the marital home or buy a new home.
Women who intend to return to their maiden name after a divorce should legally change their name before opening a new bank account or applying for a mortgage to avoid confusion and clerical errors later. This action will not affect your credit score or credit report, which is tied to your social security number.
Managing and rebuilding your credit and financial health following a divorce can seem intimidating, especially when the amount of money coming in is considerably less than when you were married. However, because you now have to make financial decisions on your own, you can use this as an opportunity to reset and begin to employ healthy financial habits. Seek financial assistance if you face challenges managing your finances on your own after the divorce. The tools and resources that FinLocker provides can make it easier to build and monitor your credit and manage your financial accounts in one place. The app categorizes every transaction in your enrolled accounts so you can see where you’re spending your income and use that information to create a new household budget. There are lots of easy-to-read and short videos on homeownership and money management to help you on your way to achieving financial stability.