When couples decide to divorce, financial assets accumulated while together must be equitably divided and in many cases, the most substantial shared asset is the matrimonial home. While each spouse is usually entitled to 50% of the accumulated home equity (minus the amounts contributed by each spouse individually when the home was purchased), if the property isn’t sold, one side will almost always buy out the other. In today’s post I’ll offer some mortgage tips to divorcées in general, and I’ll provide specific mortgage advice to divorcing spouses who are planning to buy their ex-spouse’s share of their current home.
Before we get into specifics, here are three tips that every divorcing spouse should read. First, make sure you keep paying your bills throughout your settlement period. While I appreciate the raw emotions involved in working through a divorce, refusing to pay joint bills is literally cutting off your nose to spite your face. Recent slow or missed payments will make it either prohibitively expensive or downright impossible to qualify for mortgage financing in the foreseeable future. The best advice I can give you is to make sure that all of the bills are paid (you can seek reimbursement for the expenses your spouse should have covered during the settlement phase, so keep your receipts!)
Second, separate your joint accounts as soon as possible and check your credit report to ensure that you did not miss anything. Regardless of what you and your ex-spouse have agreed about who is responsible for paying what bill, a missed payment on a joint account will hurt both your credit ratings equally. Also, if all or most of your credit has been in your spouse’s name, set up your own accounts as quickly as possible because it is much easier to get approved for a mortgage with an established credit history.
Third, since no lender will provide you with a mortgage until all of your future financial obligations can be clearly understood, complete your separation/divorce agreement as a matter of priority. Also, because your soon-to-be ex-spouse can make a claim against any of your assets, lenders will not risk such a claim on your new home while divorce proceedings are still underway.
More specifically, if you are looking to buy out your former husband/wife’s share of the matrimonial home, the first step is to agree on the property’s current market value. This can be done by hiring an appraiser, and/or speaking with real estate agents who are mutually accepted as trusted resources. If an agreement on price can be reached, the net equity in the home can then be calculated by subtracting any debts secured against the property along with the estimated costs of disposition (selling costs are included because they must be incurred in order to liquidate the property). If a price cannot be mutually agreed upon, the house will normally be listed for sale and either spouse may bid on it in the open market.
No matter how the current value of your home is established, the spouse who wishes to purchase the property must be able to afford the required mortgage, and qualifying on a single income can be difficult (for help with this question, try my calculator called "How much can I qualify for?"). When inputting your annual income, remember that if your finalized separation/divorce agreement indicates that you are eligible for alimony or child support payments, these amounts can be added to your employment income. Conversely, if you are responsible for making these payments, the lender will include them as part of your ongoing expenses. (Note: Even though alimony is tax deductible for the paying spouse, lenders will include the gross amount in their debt-servicing calculations.) If after taking this step the numbers still aren’t looking good, keep in mind that there are more flexible mortgage solutions available (feel free to contact me to discuss your individual circumstances).
Lastly, if your spouse is buying out your equity in the matrimonial home, get confirmation from the lender in writing that you are no longer registered on the mortgage, and keep in mind that simply being taken off the property’s title is not the same thing. Until you have this proof in hand, you could still be on the hook for the outstanding mortgage balance for a house you no longer own.
While getting through a divorce is often unpleasant and expensive, getting good mortgage advice can at least help save you money and unnecessary hassle. To ensure that you are left in the best possible position, try to involve your chosen independent mortgage planner as early in the process as possible, because you’ll be surprised at the difference we can make, especially when given a little time.
(Please note: You should not make any final decisions related to your separation/divorce without the advice of a lawyer. Although I can explain the concepts, point you in the right direction and provide the appropriate mortgage advice, I am not a legal expert.)
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog (integratedmortgageplanners.com/blog). Email Dave