Used with permission from bankrate.com
Divorce can be complicated for many reasons, including financial ones. The good news is that the divorce rate in the U.S. dropped to a 40-year low in 2018, according to the National Center for Family and Marriage Research at Bowling Green State University.
For every two marriages, there was approximately one divorce in 2018. Among those facing divorce, one of the biggest decisions couples face is what to do with the marital home.
Depending on how the property was financed and titled, solutions are available. The more contentious the divorce, the harder it can be to agree on what to do with your house and mortgage.
“Deciding how to deal with the family home is one of the most important issues to decide upon when there is a divorce,” says Mary Ann Ferreira, financial advisor at Viridian Advisors. “First, there needs to be a decision on who will receive the home in the divorce. Once that is decided, a budget needs to be created to see if the receiving party can afford to keep the family home.”
Here we’ll explore different outcomes and solutions for deciding what to do with your home during a divorce.
Refinancing the mortgage
Some couples decide to refinance a joint mortgage into one name upon divorce. What this does is release the mortgage responsibility from the person who removes their name from the loan.
However, unless they’re also removed from the title, they still benefit from the sale of and equity in the home, so it’s important to not only refinance but also update the title to reflect one owner. A quitclaim deed is commonly used to remove a spouse’s name from the title in a divorce.
When you refinance, you can count only your own income and credit score, says Jeremy Runnels, a certified financial planner with West Coast Financial in Santa Barbara, California.
For example, say your home is worth $300,000 and you owe $200,000 on your mortgage. You have $100,000 equity, and you need $50,000 to buy out your spouse’s share, if you’ve agreed to a 50-50 split. To get the money, you refinance into a $250,000 loan in your name only, and cash out $50,000 to pay your spouse.
Use Bankrate’s mortgage calculator to see what your new monthly mortgage payments would be.
You can ask a parent, sibling or adult child to be a co-signer if you can’t qualify on your own. However, that person becomes fully responsible for the loan if you fail to make payments. If you’ll receive alimony or spousal support, you can use that income to qualify for a refinance — as long as your divorce settlement stipulates that you’ll receive alimony for at least three years, Runnels says.
If both names are on the mortgage, your lender has to agree to any changes to the mortgage, which is a legally binding contract separate from the divorce agreement, says Linda Leitz, a certified financial planner with Peace of Mind Financial Planning in Colorado Springs, Colorado.
Before you refinance the mortgage into your name, get your spouse to agree on transferring the title to your name, too, Leitz advises. If not, he or she will still own a portion of the home even though you’re now responsible for the mortgage. A quitclaim deed is commonly used to remove a spouse’s name from the title in a divorce.
Navigating the decision to stay or sell
Kathy Kristof filed for divorce in 2002 after 16 years of marriage. She knew she could afford the mortgage payments on her own and wanted her children to have some semblance of stability as her marriage fell apart.
Kristof, a Los Angeles-based editor, enlisted the help of her mortgage broker to convince her ex to let her keep the home and refinance the joint mortgage into her name only. California is a community property state, which means that assets acquired during the marriage are owned equally and split 50-50 in a divorce. When Kristof refinanced the loan, she paid her ex-husband his half of the equity before their divorce was finalized.
“My ex wasn’t speaking to me at the time, so my broker convinced him to be cooperative and quit-claim deed the house to me,” Kristof says. “When I refinanced, I was able to get a lower rate and reduce my monthly payments by several hundred dollars, so it worked out better for me.”
Kristof’s divorce wasn’t terribly contentious. The more you can work with instead of against your spouse, the better for both parties, says Runnels, the California financial planner.
“These decisions go more smoothly when you work with your spouse rather than being at each other’s throats,” Runnels says. “It benefits everyone financially and emotionally.”
Selling the home
Negotiating who gets to keep a home could get messy if both spouses want to stay and can’t agree on what to do. A divorce agreement might spell out a limited time frame to refinance and require the home be sold and the net proceeds split down the middle if the deadline isn’t met.
If neither spouse can afford the mortgage on their own, they may have no other option than to sell. It may be in everyone’s best interest to sell, pay off the mortgage, collect their share of the net proceeds, and start fresh.
n some situations, one spouse keeps the house and mortgage but the other’s name stays on the loan documents because the lender won’t agree to remove them. That can make it difficult for the one who doesn’t get the house to qualify for a mortgage on another property.
Whether you sell the home as part of the divorce agreement, or you buy out your spouse’s share, capital gains taxes come into play. This is a tax on profits from property sales where the amount you receive exceeds a set amount.
If you sell the home, you and your spouse can each exclude the first $250,000 of gain from your taxable income. But this break applies only to primary residence that you’ve lived in for at least two of the last five years prior to the sale, according to the Internal Revenue Service. Vacation or investment properties don’t count.
Another tax wrinkle: how new rules for alimony impact how much income you can count for a new mortgage or refinance. With the Tax Cuts and Jobs Act going into effect Jan. 1, 2019, a spouse who earns a higher income and pays alimony will lose a long-standing alimony deduction and pay federal taxes on it. Meanwhile, the spouse receiving alimony won’t have to pay taxes. (This applies to divorces finalized after Dec. 31, 2018.)
A higher-earning spouse could make a case for paying less alimony, which can lower the receiving spouse’s income to qualify for a new loan, Runnels says.
Evaluating your home equity
Home equity is the value of your home, minus your mortgage balance. For example, if your home is appraised a $300,000 and you owe $100,000, your equity is $200,000. When you sell your house, the owners will pocket the equity, less selling costs. Or, if you decide to get a home equity loan, lenders will typically let you borrow up to 85 percent of the equity in your home.
The only way to truly value a home (and thus calculate equity) is to sell it, Ferreira points out. But, that’s not always feasible or appropriate. The next best thing is to get a professional appraisal.
Sometimes, however, a couple might not agree on the appraised value. This can cripple efforts to move forward and also can mean spending more time on attorneys and appraisers.
“In my practice, if the couple is cooperative and can decide on an appraisal company, that would be the best way to determine what the actual equity is in the home,” Ferreira says. “If not, each party should have an appraisal of the home and use an average value when determining equity.”
Once equity is determined, the couple has to agree on what will be deducted from the value to get to the purchase price, says Katherine Eisold Miller, founder of the Miller Law Group and director at the Center for Understanding in Conflict.
Along with the mortgage balance deduction, couples should also consider other fees that go along with selling or refinancing the home. These fees might include a broker’s commission, fix-up costs (to make the property more attractive when selling), real property transfer taxes, and capital gains taxes.
“When one person buys out the other, all these fees are up for negotiation. Typically, however, while the real property transfer taxes are a cost shared between the couple, the remaining fees are not deducted from the value,” Miller says.
What you can do with your home equity
It’s common for a couple to split the equity as per their separation agreement. Another option without selling the home is to take out a HELOC or HEL and use that cash to retire debts or to pay one or both of the spouses.
Keep in mind that while one spouse may stay in the house and continue to pay the mortgage, lenders generally will not remove the other spouse from the mortgage obligation. If the mortgage is not paid in a timely fashion, this will affect the credit rating of both parties. Being on the mortgage may also affect the ability of the non-resident spouse to qualify for another loan down the road to buy their own home.
Finding financial peace
Before you make decisions about your home or mortgage during a divorce, assemble your own team of professionals, Kristof advises.
In addition to a good divorce attorney, look for a financial planner and mortgage broker who hold professional certifications to handle divorce matters, Kristof says. Meanwhile, seeing a therapist or going to a divorce support group can help you heal emotionally.
Divorce may feel like the end of the world, but there is life — and financial peace — after the storm passes.
“You face all sorts of uncertainties; you don’t know how your kids will get through it, or if your ex will cooperate on financial decisions,” Kristof says. “Put one foot in front of the other. When it’s over, a year or so down the line, it will feel more comfortable.”