As a financial advisor and certified divorce financial analyst (CDFA), I help men and women navigate important financial issues that need to be addressed in every divorce. The first question most people ask themselves is, “Where will I and my children live after the divorce?”
When I meet with a female homeowner who has school-aged children, in most cases she will want to remain in the home while she and her spouse are separated and after the divorce is final. Unfortunately, for many women, that dream simply isn’t possible unless she can answer “yes” to these three questions:
Helping my clients get answers to those questions is one of my most important jobs as a divorce financial planner.
If you want to keep the marital home it’s a good idea to begin working with a divorce financial planner or certified divorce financial analyst (CDFA) several months before you begin divorce negotiations with your spouse. This will give you time to improve your credit score, pay down debt, increase your earnings from employment, and estimate how much you may need to negotiate in child support and/or alimony in order to qualify to refinance the mortgage in your name.
Most mortgages are not assumable which means that you will have to refinance the existing mortgage obligation in your name. Lenders will assess your credit score, monthly income, and debt-to-income ratio, among other factors.
A high credit score may help you obtain a low interest rate which impacts the size of monthly payments. This article explains how credit scores are calculated and ways to improve your credit score.
If you are a stay-at-home mom or work at a low-paying job, you probably won’t meet income requirements to qualify for a mortgage. The good news is that child support and alimony can be counted toward monthly income requirements under certain conditions. Your separation/settlement agreement or divorce decree must state that child support and/or alimony will continue for at least three years from the date of the loan application. If one of your children ages out of child support within that three year period, then the lender probably won’t give you credit for that income source. You will also need evidence that you have received these payments for at least six months. You may have to provide bank statements or cancelled checks to show that regular payments from your ex-spouse (or soon-to-be ex-spouse) have been made. Informal or sporadic payments won’t cut it.
Lenders prefer borrowers to have low debt-to-income ratios. They want to know how much money they can lend you with a high probability that you can meet all your debt obligations including monthly minimum payments on credit cards, student loans, and car notes. This website offers a free tool to calculate your debt-to-income ratio.
If your mortgage application is weak and you’re having difficulty getting approved, adding a cosigner to your mortgage could be a solution. A cosigner (usually a family member) is someone added to the mortgage application promising responsibility for the loan, but who doesn’t get any rights to the property. The cosigner must have a stable income, a good credit score, and a low debt-to-income ratio. Many people are uncomfortable acting as a cosigner because if the primary borrower is late with a payment or the property faces foreclosure, it will adversely impact the cosigner’s credit score.
Most people think of their bank or credit union first when looking to refinance a mortgage. Unfortunately, these direct lending institutions may have strict guidelines that result in your application being rejected.
A mortgage broker works with a variety of lenders in order to find rates and terms that will work best with your situation. A broker may also be able to offer loans that require no income documentation or employment verification. You can expect to pay higher interest rates with these types of loans because the lender is taking on more risk by lending to you.
This article provides more information on refinancing with a bank or mortgage broker.
If you can qualify for a mortgage, the next step is to figure out how to compensate your spouse for his or her share of the equity.
Unless there are separate property claims (the laws vary from state-to-state), you can generally give up marital assets that are worth half the home equity assuming there are enough marital assets to do so. For example, if the equity in the home is much larger than the balance of the retirement accounts and other assets, it may not be possible to do a buyout. If that is the case, the new mortgage will have to cover the balance of the existing mortgage plus cash to be paid out to your former spouse. You may not qualify for a mortgage that large.
If you are considering giving up your rights to your share of the retirement assets or pension in exchange for keeping the house, please do not take action until after consulting with a CDFA. If you are going to trade one asset for another, you need to understand their true values. This may involve making after-tax calculations of a defined contribution plan such as a 401(k), 403(b), or Thrift Savings Plan (TSP) or calculating the present value of a pension plan.
Pension plans are often more valuable than they first appear. A monthly stream of income that lasts for your lifetime can be worth significantly more than your spouse’s share of the equity in the home. Please be careful before making such a trade.
My clients and I spend a lot of time working on a budget to see if staying in the house is financially feasible. It makes no sense to spend so much money on mortgage payments, property tax, and other home expenses if that leaves you with barely any disposable income. Do you want to have to eat cereal for dinner every night?
I find that people often underestimate the cost of home ownership. As a result of the 2017 tax law, the ability to deduct property tax and mortgage interest is limited. Often, renting can be a more financially attractive option especially if you are not sure you want to stay in the marital home once your children are grown, have moved out, and no longer need to stay in the same school district. An added benefit of selling the house is that you and your ex-spouse may each walk away with cash which you can use to build an emergency fund or boost your retirement savings.
If your spouse can afford to buy you out and remain in the home that may be an acceptable option for you as the children could stay in the same school district even if you move to a less expensive neighborhood.
Another option for you and your ex-spouse to consider is to continue to co-own the house and stay on the mortgage together. However, this often means that the ex-spouse cannot qualify for a mortgage since he or she is still on the hook for the existing mortgage. Also, this option is fraught with complications. I’ve seen this option work for a limited time (such as a couple of years) if both parents commit to list the house for sale after the youngest child finishes high school. This commitment is usually documented in the marital separation/settlement agreement.
If after all the analysis you determine that it is simply not possible to stay in the marital residence, remember what writer Amy Blacklock stated in this article about home equity in divorce. According to Amy, “It’s hard to leave a family home, but the memories stay with you, not with the house.”
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