Keeping the marital home in divorce and pitfalls for the unwary.
In most marriages there is a marital home and it’s often the largest, or one of the largest assets. Particularly if there are kids, in divorce, one spouse often wants to keep the marital home.
There are pitfalls for the unwary in divorce as it relates to the marital home that can arise long after the mediation has been completed. As mediators, we can provide the service of advising our clients so they can avoid these pitfalls that could create bitter feelings towards their ex plus end up affecting their financial life for years to come.
- Being off the deed doesn’t relieve financial responsibility. Without proper guidance, one spouse may agree to sign a quick claim deed to transfer the deed to the other spouse (the “house spouse”) pursuant to their settlement, without realizing they would keep financial responsibility without ownership interest. Unfortunately, most lenders will not allow one spouse to simply assume the existing mortgage. If both spouses are on the mortgage, refinancing will probably be required to take one spouse off the mortgage. No matter what the settlement agreement or divorce decree says, if a spouse’s name is on a mortgage, the lender WILL hold him or her responsible for the mortgage payments. The mortgage will also continue to show up on both spouse’s credit report as an obligation which often keeps the spouse who wants a new house of his or her own from getting a mortgage, or for that matter, any loan they may need for other purposes.
- Refinancing may not be possible. We know that money problems are a root to many divorces. It’s not uncommon for refinancing to not be possible. While two incomes may have been enough to qualify for a mortgage to buy the marital home, one income may not be enough for the house spouse to qualify for refinancing. It’s common for the mom to want to keep the home, but her income, even with support, may not be enough. Also, refinancing comes with a cost. Fees for refinancing can be 2-4%, interest rates may have increased and the credit score of the house spouse may not be good or may have gone down which in most cases, will make the overall cost of the mortgage higher.
I’ve had more than one phone call from folks seeking help because their settlement agreement said the ex-spouse got the house and would refinance but that was not happening. Meanwhile, they were stuck in an apartment, because they were still on the marital home mortgage. Even worse, their credit was taking a hit because the house spouse was not making mortgage payments.
- It may take time for support to be counted as income for purposes of qualification. When the house spouse is depending on spousal support, child support or other payments made under the separation agreement to qualify for a loan, he or she may be surprised that a certain number of payments must be made both in the past and into the future to qualify for a loan. The number of payments required will depend on whether a conventional loan or an FHA loan will be used. With a conventional loan, Income from spousal support, child support or separate maintenance payments may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to the house spouse borrower for at least the most recent six months and is obligated to make payments to the borrower for the next three years. Evidence (documentation) is required. With a FHA loan, if using a final divorce decree, legal separation agreement or court order, income from spousal support, child support or separate maintenance payments may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to the house spouse borrower for at least the most recent three months. If receiving voluntary payments from an ex-spouse, the house spouse borrower must provide proof of twelve months of timely payments. In both cases, proof that payments to the house spouse are required for the next three years is required and evidence (documentation) is required. (Note: These time period requirements may change but the important thing to keep in mind is that there will be a delay when qualification is dependent on support payments.)
As mediators, we do our clients a service by inquiring about the ability to pay a mortgage, explain these pitfalls to our clients and recommend that the house spouse get a commitment letter from a bank prior to finalizing the settlement agreement.
- There may be unknown title problems. Down the road, the house spouse may decide to sell the home and problems with the title may be discovered during the preparation for closing. Title issues have to be fully settled before a home can be sold, and the problem is common enough that 11% of closing issues revolve around title problems. The house spouse is stuck paying for the costs related to clearing up the title. The best way for the house spouse to protect him or herself from an unwanted surprise is to perform a title search during the divorce process which costs about $75 to $200. Some of the most common title problems are:
- Liens: Liens from back federal, state, or local taxes or unpaid bills to contractors, liens from previous owners, and liens in the form of judgments, which are court-obtained documents from unpaid creditors or a parent requiring child support.
- Heirs of previous owners: If the home’s previous owner passed away before selling the home, the house spouse could end up facing heirs that come forward claiming right to the property.
- Public record errors: A clerical or filing error may seem minor, but these can take quite a while to resolve.
- Identity Concerns: When people have common name, a homeowner may be mistaken for someone else who is facing judgment. For example, if someone in the community has the same name and is taken to court for back child support, the judge could mistakenly file a lien against the wrong property.
- Costs of sale. Sometimes one parent will want to keep the marital home for just a few years. One common reason for this is to keep the kids in their home until they move out or go to college. It may not occur to them that he or she will be paying for all of the closing costs on their own. That’s big money and reason to consider selling the home now and splitting the closing costs or agreeing to share closing costs and setting an agreed upon date by which the house will be sold.
- Home insurance does not get changed. Not updating homeowner’s insurance policies can come back and cost the house spouse thousands of dollars. It happens like this:
-The husband is insured and the wife is a beneficiary. (This is often done this way because a spouse has lower credit scores.)
-They get divorced and wife keeps the house. No changes are made to the policy.
-A storm happens and a tree falls resulting in a $6,000 repair.
-Wife goes to file a claim but because she is a beneficiary, the claim is declined or the money is sent to the husband because he still shows as the insured.
As a Certified Divorce Financial Analyst and mediator, I want to help my clients have an emotionally and financially healthier divorce and prevent these pitfall’s from occurring that may spring up long after the divorce is final.