When there is a marital home (or other real estate) involved in a divorce situa-tion, the same question almost always arises: “What should we do with the marital home?” Typically, many reasons to keep the home and many reasons to sell the home are present and as the advisor, a neutral approach is needed to separate the emotion from the economics.
- Do we keep the home until the children are out of school?
- Do we sell the home, divide the proceeds and go our separate ways?
- Do we have any equity in the home or are we underwater?
- Do we refinance the home in one of the spouse’s name only?
- Do we sell the home and each rent until ready to purchase again?
Each question is a valid question; yet each question may also have its own set of consequences that need to be addressed. And in the end, there are really only 3 viable choices for what can be done with the marital home.
Selling the house and dividing any profits (or losses) is generally the easiest approach.
The timing of when this is done is a factor to consider. Selling the house prior to filing for divorce is easy, as long as both parties are on board with what happens to any net proceeds from the sale. If the sale of the home is done after filing, then both parties and the court must agree to the sale.
If the divorce settlement agreement requires that the home be sold after the divorce is final, then the decree should identify what happens with the proceeds (or losses) generated from the sale.
When selling the marital home due to a divorce, keep in mind that the ex-spouses must agree (or be compliant) on many things:
- The realtor (only one!)
- When and how is the best method of communication between the realtor and both parties
- Guidelines regarding showings and open houses – how many, when, who is notified, etc.
- Minimum acceptable sales price
- Who will be responsible for any necessary pre-sale or pre-closing repairs?
- Agreement on which appliances, etc. convey with the sale of the property.
One Spouse Buys Out the Other
Another option is for one spouse to buy out the other, or swap the equity in the home for another asset. In this case, it is necessary for the “departing” spouse – the one who will no longer own the home – to be removed from the mortgage through a refinance.
The key to a successful refinance is the ability of the retaining spouse to qualify for a new loan. The retaining spouse must have appropriate income, whether from employment or support or a combination. If support income is to be provided, it is important to understand the “6/36 Rule”: support income must have been received for 6 months and expected to continue for another 36 months after closing in order for that support income to count as qualifying income on the new loan. There are some loan products that allow for only 3 months receipt and others that require 12 months, depending upon the source of the support income. The continuation of support for at least 36 months after the closing date of the loan is a consistent requirement across most mortgage products.
A Certified Divorce Lending Professional can work with you and your attorney to help develop a settlement plan that will help a retaining spouse qualify for a new mortgage. The sooner your lender is involved, the better.
Continue to Co-Own the Home
The third option is for both spouses to remain as co-owners of the home. This can be very complicated for the divorcing couple as they are essentially entering a business partnership and therefore must agree on key terms.
Key terms to include in the agreement may include:
- when to sell
- who gets what from the proceeds (or loss)
- who is responsible for maintenance
- who is responsible for paying what portion of the mortgage
- how to handle disputes between the co-owners
In the end, it is up to the divorcing couple and their attorneys to determine the best way to handle the marital home. A Certified Divorce Lending Professional can help work through the alternatives with the couple and their attorneys, with the objective of setting both parties up for successful home ownership post-divorce.