One of the hardest decisions in divorce settlements is whether or not one of the parties can keep the marital home once the divorce is complete. Reaching a decision requires much thought, preparation and thorough financial analysis.
The marital home is often an emotional trigger for one spouse or the other, if not both. It is important to separate the emotions associated with the home from the financial realities as much as possible – an often difficult challenge, but necessary.
If one party wants to keep the house, there are two key considerations:
- Can an equitable distribution of assets be made if one party gets the house?
- Can the party retaining the house obtain individual financing for the remaining mortgage on the house?
In a divorce, community assets are divided in an “equitable” manner. All assets should be considered – checking, savings and investment accounts; significant objects (cars, jewelry, art, etc.); and of course any residential real estate. (Liabilities should also be divided equally – don’t forget about those!) If one party keeps the house, can the value of equity in the home be equitably offset by the value of other assets given to the other party?
Two ways to balance the equation are through an “equity buy-out” refinance or a cash out refinance. Both of these refinance types allow for cash to be taken from the equity of a home. In the case of an equity buy-out, the cash goes only to the party who no longer owns the home after divorce. With a cash out refinance, the cash may go to either party. The benefit of an equity buy-out is that the new interest rate is usually lower than with a cash out refinance. In both cases, the party maintaining ownership of the home will be the sole borrower for the new mortgage.
If there are sufficient assets for an equitable division of property that allows one party to keep the home without taking equity out, the party keeping the home usually is still required to refinance the home in order to remove the other party from the mortgage.
Unfortunately, it is not possible for a lender to simply remove a spouse from a loan – the only way to accomplish this is through a refinance of one type or another.
So in either case, a refinance is required. Why?
- For the party who will no longer own the home, being refinanced off the loan removes their obligation to the loan. This is important for maintaining strong credit and to enable future home purchases.
- The lender wants to be sure that the borrower is able to re-pay the loan.
To qualify for a refinanced mortgage loan, the borrower will need to demonstrate stable qualifying income, manageable levels of debt, and a qualifying credit score. If the borrower is relying on support income to qualify, that income must have been received for at least 6 months and expected to continue for at least 36 months in order to count as qualifying income. If the borrower is paying support to the other party, that support is deducted from his/her income to determine the borrowers’ ability to repay the loan.
Bottom line: thought, preparation and thorough financial analysis are critical to answering the question “Can I keep the house?” in a divorce situation.
If you are in a divorce and need help determining whether or not you can keep the house, a Certified Divorce Lending Professional (such as myself) can help. Need help? Request a consultation today.