When older couples divorce, usually one spouse wants to keep the marital home. Sometimes, the house is paid for, but often there is a mortgage. Although I find that many women find security in their home and want to keep it, to other women the house brings back bad memories, and they would rather be rid of it.
As a divorce financial planner, I educate my clients that there is more to think about than who will take over the mortgage, and I help them prevent mistakes that may not be realized until after the divorce is final.
Here are some pitfalls for the unwary that you should know, whether you are keeping the marital home or not.
Obviously, a house can’t be physically split, so whoever wants to keep the marital home will have to trade other assets equal to the equity in your marital home. Check out my article on the reasons why keeping the marital home can be a mistake. If there is a mortgage on the home, more likely than not, you will have to refinance the mortgage to get your ex off it (or vice versa).
Unfortunately, most lenders will not allow one spouse to simply assume the existing mortgage. If both spouses are on the mortgage, refinancing will probably be required to take one spouse off the mortgage.
FHA and VA mortgages are about the only mortgages that can be assumed. Don’t ever presume you can assume a loan! Before the settlement is finalized, make sure this can really take place. If assuming the mortgage is not possible, the mortgage should be refinanced.
Money problems are a root cause of many divorces. It’s not uncommon that refinancing is not possible. While two incomes may have been enough to qualify for a mortgage to buy the marital home, one income may not be enough for the “house spouse” to qualify for refinancing. If your income is low or you are retired, you may not qualify for refinancing, even with alimony.
Also, refinancing comes with a cost. Fees for refinancing are about 2-4% of the loan amount. Interest rates have increased and the credit score of the house spouse may not be good or may have gone down. These factors will make the mortgage payment higher.
I’ve had calls from folks seeking help because their settlement agreement said the ex-spouse got the house and would refinance, but that was not happening. Meanwhile, they were stuck in an apartment, because they were still on the marital home mortgage. Even worse, their credit was taking a hit because the house spouse was not making mortgage payments.
You must make sure the spouse keeping the marital home can qualify for refinancing before the settlement agreement is finalized.
Alimony can be counted as income to help you qualify for a mortgage, but a certain number of payments must be made both in the past and into the future to qualify for a loan. The number of payments required will depend on whether a conventional loan or an FHA loan will be used. I advise my clients who will be getting alimony that qualifying for a mortgage takes planning.
A knowledgeable mortgage professional will explain how long alimony must be in place, the amount of alimony needed, and what documentation the lender will need for proof. Again, this needs to be addressed before the divorce settlement is finalized.
Keep in mind that if you only plan to keep the marital home for a few years, when it does come time to sell, you will be paying for all of the closing costs on your own. You could also be stuck with repairs and even title problems that may be costly to fix. That’s big money and reason to consider selling the home now and splitting the costs of sale.
Although I discourage jointly owning a home after divorce, there can be various reasons to do that. An agreement can be made to sell the house at a certain date at which time you will split the costs of sale.
Also keep in mind capital gains taxes may apply when your house is sold. Right now, a couple can exempt $500,000 from the gains on a house sale, but a single person can only exempt $250,000. Be sure to keep capital gains taxes in mind if you intend to keep the marital home and sell it down the road.
Let’s say your soon-to-be ex wants to keep the house and, for whatever reason, you agree that the existing mortgage can stay in place. If your name is on the mortgage, it does not matter that the settlement agreement or divorce decree says he will be responsible for the mortgage. If he defaults on mortgage payments, the lender WILL hold you responsible for the mortgage payments.
Also, the mortgage will continue to show up on your credit report as an obligation which may prevent you from qualifying for a mortgage for the new home you want, or for that matter, any loan you want for other purposes.
Very specific language can be written in your settlement agreement so that the marital home mortgage won’t affect your ability to get financing. A knowledgeable mortgage professional can help you with that.
Do not agree to sign a quit claim deed to transfer the deed to your ex until you are off the mortgage. You lose ownership but keep the liability, and why would you want that?
Have you considered what to do with your marital home upon divorce? Have you looked into the various options of keeping your marital home? Would you rather sell it? What would be your reasons and what advice can you give to others in the same situation?
Tags Divorce After 60