A major issue – often times the biggest issue – in divorce cases is the marital home. Who is allowed to stay in the home during the divorce process? Who will pay the mortgage payments on the home during the divorce process? Will payments made on the mortgage during the divorce process be reimbursable? What will the disposition of the marital home be once the divorce is finalized?
The options for the disposition of the marital home – what is going to happen to the marital home – are as follows: (1) the parties continue to co-own the marital home, (3) the parties sell the home and spilt the proceeds, subject to reimbursements and credits, (3) one party assumes the mortgage, or (4) one party buys out the other.
In some scenarios, the parties may agree to continue to co-own the marital home; maybe there are minor children involved and the parents agree it is in the children’s best interest to stay in the marital home. Or, perhaps, the parties agree the property is highly desirable and keeping it as an investment is a better option than selling at the time of divorce. If you believe this option is favorable in your scenario and your spouse is staying in the home, you may want to consult a lender prior to agreement to verify that you would be able to qualify for a subsequent purchase of a home, as you will continue to be responsible for the mortgage on the marital home. Lenders will typically not assign the debt associated with the marital home to you, as long your marital settlement agreement or judgment specifies that your spouse is solely responsible for the payments (principal, interest, taxes, homeowner’s insurance, etc.). To be sure you have the verbiage correct, contact your lender prior to finalizing the agreement.
In another scenario, the parties may decide or the court orders that the house be sold and for the parties to spilt the proceeds, subject to reimbursements and credits. If you believe this option is favorable to you, consulting a lender regarding your future ability to purchase a home is prudent. Many people incorrectly assume that obtaining a large lump sum will assist in qualifying them for a future mortgage. However, qualifying for a mortgage also requires qualifying income, as discussed below. Creative settlement options – or equalizing payments – may assist one party in qualifying to purchase a new home. For example, John and Joan own a home together and have decided to sell the property. The net proceeds are $1 million and the parties are each entitled to 50%. John does not have an income. In order to qualify for a loan, he must be able to show qualifying income. Rather than receiving $500,000 directly from the proceeds, it may be optimal for him to receive $250,000 and have Joan pay him $5,000 monthly as and for Spousal Support for a little over four years, which would then equal $500,000. John would be more likely to qualify for a new mortgage. Again, contact your lender prior to finalizing the agreement.
In another scenario, the mortgage may allow for one party to assume the loan. In reviewing your promissory note, look for language allowing this option. It would allow one party to keep the current interest rate and payment. However, the party assuming the loan would have to qualify on his/her own. As above, qualifying for a mortgage (or assuming the mortgage) will require qualifying income. Make sure in drafting the marital settlement agreement or the judgment that the income, equalization payment or property/debt division will provide the assuming spouse the ability to qualify.
The final scenario regarding the disposition of the marital home is for one spouse to buy out the other spouse, generally via a refinance. If a refinance, whether by you or your spouse, is the route you wish to take, you should consult with a lender prior to finalizing the agreement to verify that you or the other spouse can qualify to refinance. In order to qualify for a mortgage, the lenders review income – and not all income is created equal. For instance, part-time earnings must be consistent, bonus income is generally averaged over 2 years, rental income is the net income after all expenses using a 2 year average, new employment income is only considered for salaried workers, liquid assets are generally not considered, and support must have a minimum six month history of receipt and a minimum 3 years continuance from the close of escrow. If you merely come to an agreement that one spouse will refinance within 90 days of the judgment and you do not verify qualification is possible, you will potentially be back in court fighting to keep the house or to force a sale. Creative settlement options may be the difference between a buy out and a sale. Make sure you consult your lender to determine whether or not you have sufficient qualifying income before agreeing to a refinance.
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