DEALING WITH THE MARITAL HOME MAY BE A CHALLENGE IN DIVORCE
The website Credit Marvel published an article titled “How is Our Mortgage Affected During Divorce?” that we comment upon here. The article’s text is in regular type; our comments are in bold italics. Here it is:
With all of the changes in the mortgage industry since 2008, divorce affects mortgage lending more than ever before. One divorce statistic that hasn’t changed since then is that about half of all marriages end in divorce. The United States has the 6th highest rate of divorce in the world. About 41% of first time marriages will end in divorce. The rate is slightly higher at 60% for second-time marriages. Couples that enter the altar for the third time are the most likely to divorce at a rate of 73%.
There is a growing trend in “gray divorce.” Couples age 50 and older are twice as likely to divorce now as they were in 1990. The rate is even higher for couples over the age of 65.
The good news is that if you are married for the first time and your marriage lasts longer than eight years, the odds are finally in your favor of staying together. Age at the time of the marriage is also a factor. Couples that wait until they are over the age of 25 have a better chance of staying married than younger couples. Wilkinson & Finkbeiner Family Attorneys have compiled a comprehensive list of divorce statistics that include a breakdown of statistics by religion, occupation, age, and other data.
The costs of divorce have an impact on making a decision to split. The average legal cost of getting divorced is $15,000. Many couples simply can’t afford to get divorced. In our experience, the cost of divorce varies depending upon the divorce process utilized; it could cost much less for mediation, but could cost much more for litigation. Please see our other blog posts which compare the difference divorce process options.
The Impact of the Financial Crisis on Divorce and Mortgages
The financial crisis of 2008 changed the economic climate for mortgage lending. Couples that got married before 2008, found it fairly easy to get a mortgage. Those were the days when lenders were happy to lend up to 125% of the value of a home.
Couples that look to get divorced after 2008 will find that it’s not so easy to get a mortgage as it was at the time they got married. The high rate of foreclosures and short sales have caused mortgage lenders to tighten up the criteria for mortgage qualification. This makes it more difficult for one spouse to buy out the other during a divorce.
Prior to 2008 most lenders considered owning a home to be a couple’s largest asset. It still is, but mortgage lenders are also keenly aware that a mortgage is a divorcing couple’s biggest liability. The responsibility for the family home and the mortgage payments that go with it are the responsibility of both spouses until the house is sold or refinanced. This is true from the bank’s standpoint assuming that both spouses are names on the Note and Mortgage; however, this is not necessarily true from a divorce attorney’s standpoint or from the divorce court standpoint.
Options for Managing the Mortgage During Divorce
It’s less likely that one spouse or the other will get the house in the divorce settlement. Regardless of what a judge decides, it’s more likely that a divorcing couple will make a decision about the house based upon which of them can actually qualify for a new mortgage. We often see couples making decisions about the house based upon a number of factors in additional to ability to qualify to refinance.
The easiest option to manage a mortgage during a divorce is for one spouse to refinance the house under his or her own name. At the start of a divorce action, statutory automatic orders go into effect which prohibit a refinance during the divorce action unless both spouses consent in writing. How the mortgage is managed during the a divorce is an issue that may need to be addressed at the outset of the divorce action, either by agreement of the spouses through their attorneys or if unable,then by application to the Court and subsequent court order. The attorneys will consider the value of the home when settling the rest of the marital assets. The spouse seeking the refinancing needs to have good credit and adequate income to be in a good position to have a new mortgage approved. This works provided the couple is not past due on any mortgage payments for the last 12 months and the other spouse agrees to let go of the house. In our experience, banks are generally reluctant to release either spouse from a joint mortgage obligation until one or the other spouse formally refinances the loan in which process one spouse’s name will be removed from the Note and Mortgage .
When neither spouse is able to purchase the other spouse’s share of the home and the real estate market won’t support the full debt that is owed on the home, it may be possible to sell the home on a short sale. A short sale is where the bank agrees to take less than is owed on the mortgage to avoid a foreclosure. This would leave both spouses without a mortgage to worry over. The downside is that pursuing a short sale will negatively affect the credit of both parties.
Another means of dividing the house is for one partner to sign a quit claim deed. This transfers the interest from one spouse to the other. It’s important to consider that it doesn’t relieve either spouse from the responsibility for the mortgage. If the responsible spouse defaults on a mortgage payment, the other spouse will still be liable for it. Any properly prepared Settlement Agreement would address this scenario as well as all of the other scenarios regarding the disposition of the marital residence, including detailing the obligations of both parties and the ramifications if one spouse or the other defaults on their respective obligation(s).
Depending upon the rental market for the area, spouses may agree to rent the home to a third party. This means that they will need to work together on the financial aspect of renting the home.
The final option is for divorcing spouses to continue living in the home together until the other is in a better financial position to secure a mortgage to buy the home. This living arrangement is not often sustainable.
Making an Equitable Financial Plan for Divorce
What seems like a reasonable divorce settlement on the surface can have negative long-term impact on spouses. A Certified Divorce Financial Analyst (CDFA) can be of valuable assistance to divorcing parties and their attorneys. CDFA’s are experts at identifying marital assets, developing a post-divorce budget and analyzing the financial impact of the proposed division of assets. CDFA’s take a long-term approach to analyzing after-tax cash flow and net worth for the future five years and longer.
The Institute for Divorce Financial Analysts (IDFA) gives a simple example of how CDFA’s can help. A married couple with a $165,000 home has equity of $77,500. Other financial assets total $165,000. The husband nets about $68,000 per year. The wife has not worked during the marriage and hopes to get a job for slightly over minimum wage. The assets are divided equally, including deeding the home to the wife. The husband agrees to pay child support, alimony, and child support (sic). The CDFA performed a long-term analysis and determined that the husband’s assets would grow dramatically while the wife’s assets would be completed depleted within seven years. The CDFA made suggestions to the attorneys that would put the couple on equal financial footing now and in the future.
Considerations for Getting a New Mortgage During Divorce
Mortgage lenders will consider all assets and debts when deciding to approve a mortgage. The spouse that applies for a mortgage will need to provide the lender with all pages and schedules of the divorce decree. The lender will consider all payments for alimony and child support payments as a debt when making a decision to approve a mortgage.
Attorney, Katie Connell, cautions divorcing spouses against buying a house before the divorce is final. She cites a case where someone put $10,000 earnest money down on a home and then was not able to secure a mortgage and lost the earnest money. The other spouse sought to be compensated for half of the $10,000, since it was a marital asset before the divorce was final.
Final Thoughts About Mortgages and Divorce
Divorce lawyers do more than help divide assets and manage the legal paperwork. They know that divorcing couples are running high on emotion, especially those that have children. Divorce lawyers will help their clients identify all current financial marital assets and work with the other spouse’s attorney to divide the assets as equally as possible. Nearly every couple has emotional ties to their homes and communities. The best divorce attorneys will help their clients make decisions based upon logic, rather than emotion. They do this by helping their clients paint a picture of what their lives after the divorce will look like. Often that includes showing them how letting go of owning the family home puts them in a better financial position overall.