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Divorce and the Home
(provided by Stacy Francis, CFP®, CDFA™)
There are many questions about a marital residence that you may ask at the time of divorce. Here are the typical questions that arise and how they may be best addressed.
To stay or not to stay, this is the question?
If you wish to continue to reside or own a particular property of the primary residence after the divorce is final, it is important to discuss if that option truly makes sense for you. Will you be able to take on the entire responsibility of the house payments, taxes, insurance, upkeep, maintenance, and other related household bills? Does the household income support these financial obligations now? Will you be able to cover anticipated increases in expenses, such as real estate taxes or utilities? What about unexpected expenses, such as a new water heater or major appliance? Is there a chance your personal income might decrease?
After your divorce is final, will support payments make managing your house and household impossible or easier? It is important that you are made aware of all the potential financial issues that might come up and decide honestly if you can actually remain in the house.
Equity? And what is fair?
The equity in the home needs to be determined by an appraiser, a licensed appraiser, not a real estate agent. The appraised value less the eventual costs of selling (commissions and seller closing costs and any loans) equals the net equity the client may be obligated to share in some percentage with the spouse. In some states, any money either spouse contributed to the home from pre-marital assets must also be accounted for as separate property in determining the final division of net equity.
If you choose to stay in the home, there are two choices using the cash out for the property, either refinance or take a second mortgage. Even though you might now be qualifying for a loan without your ex-spouse's income, with good credit and income, it should not be an issue, depending upon the amount of the loan. Often child support and alimony are viewed as stable income, especially if they have been received for three months and are likely to continue for at least three years.
It is important to know that even though the divorce decree awarded you or your ex-spouse the home, in the eyes of the bank, both of you are responsible for the payment unless one party is removed from the mortgage obligation. Many couples make the mistake of thinking that if the ownership is removed from one spouse they are no longer obligated to pay the mortgage if it goes into default.
Financial Responsibility:
Because of this obligation to pay for the home regardless of who lives there, if your name is on the mortgage note, you are obligated to pay the debt. It is imperative that the person responsible for payments remains current and in good standing.
Purchasing another property before the marital home is sold?
It is difficult and not usually advised to purchase another home until a divorce is final, although there are some situations where this action might make sense and the parties might be able to afford to do so. A prequalification would be necessary and can be arranged by a mortgage broker or banker. Remember the rules for alimony and child support stated in this article are for qualification purposes, and the necessity of having continued good credit and no late payments will make this much easier to achieve. However, also keep in mind that any joint debts that have not been released until after the divorce will be taken into consideration and can hinder the application of a new mortgage for new property.
Information provided by:
Stacy Francis, CFP®, CDFA™
located at http://www.francisfinancial.com/
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