Ending your marriage? Been there. And it stinks, especially if you have to unravel your financial interests and what once represented your shared dreams at the same time.
Yes, when a marriage ends, more than your relationship status changes. One of the most important and potentially complicated changes you have to make is to your living arrangements. Not only does your divorce impact where you live, but also the financial commitment tied to your mortgage if you own a home together.
"Usually, the mortgage is the biggest liability the couple has to split. And divorcing your mortgage isn't easy," said Bankrate. "In the eyes of the mortgage lender, you remain married and liable for the mortgage unless you sell the house or refinance."
Selling and refinancing are two of the most popular options for dealing with your house during a divorce. But they aren't the only ones. Let's break them down.
Sell the house, deal with the profits
This is a common practice when divorcing and is often the option required by the court, if the divorce is contentious and both parties have been unable to come to an agreement on their own. Assuming there is: a) some equity in the home; b) it's considered community property; and c) there isn't any prior agreement (in writing) regarding the interest in the home, the equity is often split 50–50.
"During the course of a marriage, any property the couple acquires during the marriage is considered community property," said FreeAdvice Legal. "Generally, if the house was purchased with community property funds during the marriage, the house would be considered community property because the source of the funds determines the character of the item. When the house is considered community property, each spouse would have a one half interest in the house and would have a one half interest in the equity."
Refinancing to stay in the house
If one person wants to stay in the house and has the financial means of doing so, buying the other party out and refinancing is an option. But, it's not always easy to pull off.
Presuming the qualification when you first bought the home was based on two incomes, you may have trouble qualifying on just one. You'll also need to meet the lender's credit score requirements. And, extensive outstanding debt and high alimony and/or child support payments to the other party can create issues for lenders.
"Even if the breadwinner spouse is the one refinancing, challenges can arise, Mathew Carson, a broker with San Francisco-based First Capital Group, told the Wall Street Journal. "For example, he has a client who was unable to qualify for a jumbo refinance despite a $250,000 annual income." Her debt-to-income (DTI) "is 45% due to her earnings being reduced by the $3,500 a month she pays in alimony and child support to her ex-husband, he said. She also has credit card debt."
Staying on the mortgage but moving out
Refinancing removes the other party's name from the mortgage and releases them from the financial obligation. But if refinancing isn't an option, one party wants to stay in the home, and the soon-to-be-former spouse is amenable to remaining on the mortgage after moving out, there is another option.
Starting Point Real Estate
"Sometimes a spouse may agree to stay on the mortgage, trusting the ex to continue making payments," said Bankrate. It's important to remember that the loan balance and all payment activities will continue "to appear on both parties' credit reports - even if all payments are made on time."
Assuming the mortgage
In most situations, a lender won't remove one of the party's names from the mortgage without refinancing. A quitclaim deed can transfer interest in the property but does not absolve the party from their financial commitment tied to the mortgage. But, while rare, mortgage assumptions that would allow one person to "assume" the mortgage while releasing the other from liability are sometimes still possible—and worth looking into—for couples investigating the best options for dealing with the marital home when divorcing.
"Ask your lender if the mortgage loan is ‘assumable,'" said Home Guides. "Keep in mind that you must earn sufficient income to qualify to assume the loan, and know that not all mortgages can be assumed. If your lender allows you to assume the mortgage, you usually must provide a copy of a divorce decree. Some lenders will also require you to prove your income through pay stubs and tax returns, just like you did to qualify for the original home loan."
Both parties remain in the house
For many divorcing couples, the idea of continuing to live in the family home with your future ex sounds less than desirable (hence, Philly magazine's article titled, "Is This Nuts? More Couples Living Together After Divorce.").
The advantages: No upheaval for the kids and no marked increase in expenses because you're going from one household to two. The main disadvantage: Having to still live with a person you'd rather not to have to see every day. And don't even get into the dating while divorced and still living together conversation, which, obviously has the potential for making things at home really weird.
The most successful cohabitation situations among divorced couples tend to surround homes that have separate spaces, so one person isn't sleeping on the couch in the middle of the living room and both enjoy some semblance of privacy.
Split the house in half
If all else fails, just divide your home in half. Or, make sure you buy a dividable home before you marry the next time.
"An Amsterdam-based design studio has created a floating home that separates into two spaces when its unhappy inhabitants break up," said Elle Décor. "According to Dezeen, self-proclaimed PR and pop culture expert Omar Kbiri approached Studio OBA with the idea for ‘Prenuptial Housing' after hearing breakup stories while searching for a place with his current girlfriend. Sounds like a romantic guy! The home consists of two independent prefab units which float on water, and Studio OBA designed a system which keeps them entwined. When you and your partner separate, simply disconnect the units and they'll begin to drift apart. On the bright side, as Kbiri points out in a press release by the firm, should you reunite, the units can reattach."