For most people, their home is the most valuable asset. As you assist someone through a divorce, carefully considering your client’s options related to the home may be the biggest factor in reaching a settlement. This checklist can help you and your client determine the best options. Apply these questions to any properties that your client and their spouse own.
Property Related Financial Disclosure
These first few items should be part of the financial disclosure process.
- Who is on the title? If you do not know, look through the closing documents from the purchase or look up the property in your city or county tax records.
- What is the property worth? There are several ways to determine the worth of the property, but the best is to get an appraisal from a professional appraiser.
- What is the current mortgage? Who is on the loan? Even if your client is not on the loan, it is important to understand the original and current loan balance, the interest rate, and the term of the loan. If possible, obtain a copy of the latest mortgage statement and a copy of the closing documents from the purchase or refinance of the home.
- How much is the home insurance? Obtain a copy of the homeowner’s insurance statement and policy.
- How much are the annual property taxes? Obtain a copy of the tax bill.
- If there is an HOA, what are the HOA fees?
- Have your client obtain a copy of their credit report. Everyone is entitled to get one free credit report from each of the three credit reporting agencies each year. Credit reports are available at annualcreditreport.com. I recommend obtaining one report from one agency every 3-4 months. Alternatively, your client may pay for copies of your report from the agencies (i.e. www.experian.com). If your client purchases the reports, then they may also obtain a copy of their credit score; make sure they get a FICO score, which is what lenders use to determine credit worthiness for a loan. Ask your client to review the credit report, making sure that the information is accurate. If there is something they don’t recognize, have them contact the lender and find out more.
Deciding What to do with the Property
There are really only 3 options when it comes decisions related to co-owned property: sell it, one person “buys out” the other, or continue to co-own the property. (Learn more about these options here.) To help you determine which option is best, complete these checklist items.
- Does either spouse want to keep the property? Why? There are many reasons that one of the spouses may want to keep the home, such as wanting to keep a stable home for children, keeping children in the same school, remaining close to a support network, family history associated with the property, difficulties associated with moving, etc. Ask your client to think through these reasons as rationally as possible.
- Can either spouse afford the property on their own? Have them complete a budget or expense worksheet to help make sure. Include all expenses. As a rule of thumb, housing expenses (mortgage, insurance, and taxes at a minimum, better to include maintenance) + all other monthly loan payments (car loans, credit cards, student loans, support payments, etc.) should be 45% or less of total gross income. (Gross income is income before taxes and other deductions are removed.)
Planning for the Future
- If your client plans to buy a new home, what can he/she afford? A mortgage lender (preferably a Certified Divorce Lending Professional such as myself) can help determine what your client can afford. Obtaining a prequalification is always recommended before beginning house hunting – this ensures that your client knows what he/she can afford. It is particularly important to work with a CDLP® during the divorce process to help develop a settlement agreement that will help your client buy a home post-divorce.
- When is the right time to buy a new home? If your client plans to buy a new home, the best time to do this is after the divorce is final. It is possible to buy a new home prior to the divorce being final, but doing so is much harder and requires permission from the court.
Selling Your Jointly Owned Property
- Select one realtor to represent both spouses. The realtor should be a neutral third party who will look out for the common best interests. Hopefully those common interests are to sell the home as quickly as possible, for the best price possible.
- Set expectations up front. Have your clients discuss and agree on items such as the minimum acceptable sale price, scheduling showings, who is responsible for paying for any necessary repairs, etc.
- Ask your clients to establish communication guidelines with their realtor. Communication with the realtor is critical – make sure discussions are summarized in writing and key decisions are documented.
- Ask your client to supply their realtor’ contact information to you. In case of any issues, your may need to contact the realtor.
Buying Out the Property from a Spouse
- Plan for your client to refinance the mortgage into their name only. A lender does not care if what the divorce decree says in regards to who is responsible for paying the mortgage post-divorce. If your client is keeping the house, then he/she need to ensure the mortgage is only in their name. There are two ways to do this – via a refinance or an assumption. Generally a refinance is less expensive and may also create an opportunity to obtain cash from the equity of the home which can be used to pay out the ex’s interest in the home. A refinance should be done as soon as possible after finalization of the divorce. If your client is receiving support from your ex and that support is necessary to qualify for the mortgage, there are certain guidelines that must be met. A CDLP® can work with you and your client to determine what you may qualify for and to help complete the refinance.
Co-owning property with an ex-spouse may be challenging, but in some cases is the best option.
- Prepare a “partnership agreement” related to the property. This should include:
- When will the home be sold?
- How will any proceeds or debts upon sale of the home be allocated?
- Who will pay for expenses related the home during joint ownership? Include the mortgage, insurance, taxes, maintenance, repairs, etc.
- How will the ex spouses determine which repairs and maintenance are necessary?
- Determine who will pay for the martial home during the divorce process. This is very important, as it is detrimental to both spouses if any mortgage payments are missed. Identify and document in writing who will pay the mortgage, the insurance, the taxes and any requirement maintenance of the home (HOA fees, lawn care, utilities, repairs, etc.) during the divorce process.
- If your client is paying or receiving support, make sure the support agreement is in writing and that your client pays or receives the support exactly as determined in the agreement. Any variations in payments from the agreement may complicate future mortgage financing – for example, a variation in receiving support could eliminate all support payments from being used towards qualifying income for a new mortgage. If possible, set up automatic payments through a service or your bank(s) to help document the payments. This guideline applies whether the support is temporary or permanent.
A Certified Divorce Lending Professional® (or CDLP) has special training and expertise to navigate the complicated intersection of mortgage lending, real property laws and tax codes. CDLPs work with attorneys or financial advisors and their clients to:
- Identify the options for and implications of dividing residential real estate
- Identify divorce settlement agreement elements necessary to support future residential real estate financing needs
- Manage post settlement residential property transactions
A CDLP can help you and your client make decisions about existing residential real estate and prepare your client for future residential real estate financing needs. Your client’s goals for future home ownership are critical to understand early in the divorce process so you can craft a settlement that supports those goals. However, attorneys and financial advisors are not experts at mortgage financing, the same way loan officers are aren’t experts on the law or financial planning, and a CDLP can step in to provide that expertise and detailed recommendations specific to your client’s mortgage situation and goals.
Even if you did not engage a CDLP during the divorce process, one can help after the divorce as well. Their additional training will help ensure a smooth process for a refinance or a purchase.