Paying For the Marital Home After Divorce

economic considerations divorce 1

When couples divorce, most spouses want to keep the marital home, creating a battle over who will actually retain the marital home. But rather than focusing on the turf war, spouses should think about the varied difficulties associated with assuming the mortgage on the house, particularly if that spouse will also have to make child support payments.

For one spouse to retain the marital home, that spouse must refinance the home and pay the other spouse his or her share of the equity in the home. For many spouses, this might be a challenge financially. If the couple used both incomes to pay the mortgage on the marital residence, it seems unlikely that only one income could be sufficient to continue to pay the mortgage, let alone pay the equity owed to the other spouse. So, if a couple bought too much house prior to divorce, the only option at that point would be to sell. Ultimately, under these conditions, only very wealthy individuals with sufficient liquid assets will be able to keep the marital home, pay the other spouse his or her equity in the marital home, and refinance the mortgage – and just because that person can afford it does not mean that it makes good financial sense.

Even for couples that did not overspend on a house or individuals with solid incomes, keeping the marital residence will have similar complications – one spouse will have to have the income and assets to refinance and pay the other spouse his or her equitable share. And when it comes to refinancing the home, that can become quite a challenge. First, the gross household income will shrink significantly. Second, if the parties have children, someone must pay child support, and child support payments count as a liability in calculating the expense-to-income ratio for underwriting.

Generally, every dollar of support requires $2.50 of income to qualify for a loan. So, a $500 support obligation requires $1,250 of income above the general qualification level. Also, under current federal regulations, a borrower must have mortgage and credit liability payments that do not exceed 43% of monthly income. If you make $5,000 a month, that leaves you $2,150 for mortgage, credit card bills and child support obligations. A $1,500 mortgage (including property taxes and insurance) that would be acceptable at $5,000 a month without support is now unsustainable with a $500 support obligation. These limitations apply even if the spouse paying support is not interested in keeping the marital home but looking for a new residence – meaning you better look for less home if you have a higher support obligation.

Beyond deciding who can afford to finance what type of home, each spouse must consider the implications of the current marital mortgage. If the house will be sold, the equity will not be sale price minus mortgage — if you want to evenly share the burdens of selling the house, which includes commissions to real estate agents and association fees, as well as escrow, title insurance and inspection fees.

Finally, both spouses should remember that a quit claim deed does not eliminate legal liabilities on the house, only a legal claim of ownership. Until a spouse is removed from the mortgage, both spouses remain on the hook for any default. While a hold harmless clause in a separation agreement can insulate some liability, the only protection to liability for default by the other spouse (and damage to one’s credit) is removal from the mortgage. Both spouses will want to take steps in a separation agreement to lay out the specifics to assure payment and a limited window to refinance.

If you have questions about refinancing the marital home and divorce, contact us – we can help.

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