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(provided by Kevin Zlock, P.C.)
In most divorces, the marital residence is one of the most substantial assets in the entire marital estate, if not the most substantial asset. What makes real estate unique from other assets, such as bank accounts, retirement accounts, and other investments, is that it is an asset usually tied to a liability, such as a mortgage or a home equity line. Consequently, when parties are going through a divorce, one of the challenges is determining what happens to the marital residence. Below are some considerations:
1. Would you qualify to refinance?
Oftentimes, one of the parties expresses a desire to keep the marital residence which is mortgaged in both names. In order to accomplish this goal, the party keeping the marital residence would have to refinance the mortgage into his/her name only in order to remove the other party's obligation towards the liability, as well as to pay the other party his/her share of the equity in the marital residence, if applicable. This can pose special challenges depending on the circumstances.
Example 1: Wife is a stay-at-home mom who can afford to pay the mortgage, homeowners' insurance and real estate taxes given the child and spousal support husband pays her, but her credit history is limited, and she has no other income. Absent finding a co-signer for the mortgage or obtaining a personal loan or some other unique arrangement, wife would not qualify to refinance and would be unable to retain the marital residence. However, the situation is not hopeless, if the parties are willing to get creative. Even if wife is unable to keep the marital residence in the long term, the parties can make arrangements that would permit wife to stay for a set period of time, long enough to allow the children to finish school, etc.
Example 2: Husband is planning to keep the marital residence and has contacted his mortgage company to obtain preapproval. The mortgage broker has advised husband that he will qualify provided that his debt to income ratio remains constant, even though husband could afford to incur additional monthly obligations beyond those he currently has. Wife is seeking support from husband, and the parties have reached an agreement they have yet to formalize. If wife wants husband to qualify for the mortgage, she should agree to hold off on finalizing the support agreement until after husband successfully refinances the marital residence into his name only. Otherwise, the parties may be forced to sell the marital residence, resulting in less equity to share for both parties given the expenses associated with selling real estate, including transfer taxes, brokers' fees, etc.
2. Should you keep the house just because you can afford it?
People become attached to their homes and understandably so. Consequently, there is a desire to stay if the finances allow. Yet the house that worked well for the parties when living as a family may be too big for the parties once separated, as one party will be solely responsible for mowing the lawn, performing exterior maintenance, cleaning the interior, and performing other household chores, which can be burdensome, especially when children and pets are involved. After considering the additional burdens one would have to take on to maintain the marital residence, it may be a better decision for the parties to sell the marital residence, however emotionally difficult it may be, and purchase smaller homes, allowing them to reduce expenses and save for the future.
3. Is your house "underwater"?
In this down market, many people are in a situation where the liabilities on their home exceed the market value of their home, rendering their home "underwater". This scenario makes it very difficult for either party to refinance, unless additional cash is available to reduce the amount of the mortgage necessary. This scenario also makes it very difficult to sell the property, especially if the parties do not have the cash to cover the amount of the excess liability. Additionally, the parties may be in a position where they cannot afford their mortgage payments anymore. In such circumstances, it would be advisable to consider alternative options, such as a "short sale." These options give people the opportunity to minimize the damage to the extent possible, allowing them to start rebuilding their credit and finances as soon as possible.
4. Don't discount the benefits of owning real estate.
Although there are potential downsides to keeping the marital residence post-divorce, as mentioned above, it is important to remember the benefits of owning real estate. Each mortgage payment brings you closer to owning an asset outright, whereas paying rent gives you no ownership rights whatsoever. Paying both your mortgage interest and your real estate taxes gives you a tax benefit, permitting you to claim the interest and taxes paid as deductions on your income tax return and thereby reducing your tax liability at the end of the tax year. Additionally, while the real estate market may ebb and flow, historically, investing in real estate is worthwhile financially. If you look at market values 20 years ago and at market values now, you will see that most homes increased in value and some substantially so. The same would not be true if you compared market values 2 years ago with market values now, but remember that real estate is usually a long-term investment, where patience leads to the best result.
In closing, think carefully before deciding to keep or sell the marital residence. Weigh the pros and cons carefully, and keep in mind that the best decision for one family may be the worst decision for another.
Information provided by:
Kevin Zlock, P.C.
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