When you say “I do” to the love of your life, you never dream you’ll be in the middle of a divorce someday. But it happens to the nearly half of us. If you are in the middle of a divorce or considering a divorce and you own a home with your spouse, things will get complicated — financially and emotionally.
“Even your attorney doesn’t know everything there is about money and getting a divorce. Unfortunately, there aren’t many people that do,” says Noel Cookman, divorce lending specialist at The Mortgage Institute in the Dallas/Fort Worth area. “I’ve specialized in divorce lending the past 15 years. I have the smartest clients because they call me early in the process.”
He says working with an accountant or someone that knows how divorce can affect finances early on in the process can make things easier for both parties. But once the decree is written and signed, it’s probably too late.
“The decree is a solid, unmalleable document. We have to live with whatever is in the decree,” he says.
But homeowners who come to an accountant, finance person or lender who knows about divorce and the things that should be done before a decree is signed will come out of the event with possibly more fair and livable outcomes.
Here are a few options that should happen before the decree is signed:
Option 1: Refinance the home
If one spouse wants to keep the home, he/she can get another loan to have the sole title to the home. If there is equity in the home and the other spouses needs to be paid off for half of the equity, many lenders will allow for higher loan to values and no penalties for the equity that is leaving the home.
If both people’s names remain on the original mortgage, that means both are liable.
“I’m on a crusade. Stop this nonsense of awarding property to one of the spouses without refinancing of the debt,” Cookman says. “The court and the lenders can’t force a refinance. The lawyers and judges don’t know what to do.”
Even if one spouse is taking responsibility for the mortgage and the other spouse gives them a quick deed to the house, it doesn’t mean much to the lender. If that spouse who is supposed to be paying the mortgage and the property taxes on the house somehow gets behind, the bank can come after the other spouse. And any liens against the house become the responsibilities of both parties.
And don’t forget that a mortgage affects someone’s credit history and credit score. If your ex gets into trouble financially and can’t pay the house payment for a few months, that reflects on your credit score badly, too, since your name is on that original mortgage.
Also, if the leaving party wants to buy another house but their name is still on the original mortgage of the ex’s house, it will count toward his/her Debt-to-Income ratio (DTI).
“That mortgage payment on your original home with your ex counts against you even though the other party is paying it,” says Tony Lacy-Thompson, divorce mortgage specialist at Arcus Lending in San Jose, Calif.
Option 2: Sell the home
It might not be what everyone in the family wants, but sometimes you just have to sell the house to get everyone’s name off the mortgage. The profits go to paying off the existing mortgage. The rest is split among the couple or to meet the divorce decree requirements.
“If one party can’t buy out the other party in the divorce or get a refinance loan, then it has to be sold,” says Lacy-Thompson “Even if you have kids and you don’t want to disrupt their lives any more than has happened, sometimes selling is the best bet. You get money, and it’s really a new start for everyone.”
He also recommends that divorcing couples need to end ties with all credit situations – such as joint credit cards and car loans.
“You have to get off of all that stuff that is joint, so just your own debts are showing on your credit history,” he says.
That way, when it is time for buying a home, it is strictly your income, credit score and debts that are being looked at and not an ex-wife or ex-husband’s late payment charges on their VISA.
Couples also have to think about how alimony and child support payments can affect their ability to get a home loan. It all is included in your DTI, which can be made to look better if you are the receiver of such payments, or look worse if you are the spouse that is paying out. Those payments are debt, which are counted toward your overall financial snapshot.
Cookman advises divorcing people to look for lenders with integrity who understand the ramifications of divorce on someone’s financial situation.
“People who are divorcing are vulnerable. You need to find someone who is grounded and stable, who will not take advantage,” he says.