One of the biggest issues we see in divorce situations is who gets to keep the house. In most cases where the wife has primary physical custody of young children, she wishes to remain in the home. This is understandable as she may want the kids to stay in the same school, or she may just want to keep her life and routines as consistent as they were before the divorce.
While we can certainly understand the desire to keep the home, this decision can pose some financial risks for one or both of the parties to the divorce.
Let’s look at some possible scenarios and their possible consequences:
1. The parties agree that the wife will stay in the house and buy up the husband’s share of the equity. In situations where the husband and wife have similar incomes and savings, this can be a viable option. The wife simply obtains a mortgage in her own name, the husband’s name is removed from the deed, and the wife pays the husband half of the equity of the home from existing savings or investments.
The situation becomes difficult if the wife’s income is significantly lower or she was not employed while looking after the children. It may be difficult or impossible for them to qualify for a mortgage in their own name based on their current income (or lack thereof). Although lenders include child support and/or child support received in their calculations, most will want to see 6-12 months of consistent payments and a court order before considering the support as income. Even if your divorce becomes final next month and the agreement stipulates that you receive monthly support, the bank probably won’t count those payments as income for you until there’s a 6 to 12 month trail of payments. In addition, many spouses can receive financial support during the separation but before the divorce is final. Since these payments are not subject to a court order, they are not counted.
2. Since the spouse who will stay in the house is not entitled to a new mortgage, it is agreed that this spouse will pay the mortgage and the associated costs, even though the loan is in the other spouse’s name. This may at first seem like a sensible decision. In the interest of keeping the kids in their home, the spouse whose name is on the mortgage agrees to let his or her ex live in the home as long as they pay the mortgage, taxes, and insurance. At some point in the future – maybe when the kids are out of school – the house can be sold and the equity then divided. This scenario has some potential pitfalls.
First, the spouse who will not live in the house wants to buy another house one day. While some high earners may qualify for a second mortgage, most people will not be able to get credit to buy a new home if they still have a mortgage on their first home.
Second, what happens if the spouse living in the home defaults on the mortgage? Or, even worse, not pay at all? Even if the divorce decree specifically states that the spouse in the home is responsible for paying the mortgage, the lender will only honor the name on the note. If there are arrears or even foreclosure, this will affect the creditworthiness of the spouse whose name is on the mortgage. Since there are no adverse consequences to the spouse’s late payments in the house, he or she may choose to pay other expenses first, knowing that the late payments will only affect the ex.
3. One spouse insists on keeping the marital home, leaving the other spouse with most of the savings, investments, and retirement accounts. This is another common situation that we come across. I’ve seen many divorce settlements that split all marital property equally, but one spouse ends up with mostly liquid assets (like savings accounts, stocks, mutual funds) and the other ends up with the house, which is very illiquid. If the spouse who gets the house has little or no emergency reserves or backup savings, they are really playing with fire. An adverse situation like a job loss, disability, or major home repair can ruin them financially. If you decide to forego other more liquid assets to keep the home, make sure you plan for the unforeseen problems that will inevitably arise.
The point here is to consider any “what if” questions that may arise in the future before making a decision about what to do with the marital home. It’s often your greatest marital asset, so think about all the pros and cons before signing your agreement.