Marital Home and Divorce
For many people, one of their most important marital assets is the marital home. Even when there is not much equity in it, the marital home can have a high emotional value for one or both the parties, especially when there are children. On this page, we discuss some of the options around keeping the home and your ability to refinance the marital home or finance another home.
This is often the question at the forefront of at least one of the parties. It may be that they are trying to minimize the disruption to the children or are afraid that they will never be able to afford to own a house again. Some people will give up retirement funds, investments and make many other concessions just to keep the house. However, it is not always wise to keep the house for a variety of reasons, including tying up financial assets and the cost of maintaining it. Additionally, most people need to have a mortgage to finance the purchase of the house. While it is possible for both parties to stay on the existing mortgage for a period of time after the divorce, it is typically not a longer-term solution and the house will eventually need to be refinanced, the existing mortgage assumed (if allowed by the lender) by the person keeping the house, or the house sold.
If there is equity in the house (market value less debt), then the equity can be offset by other marital assets (e.g. exchange the house for investment funds). If you can qualify, you can see if the current lender will allow you to assume the loan if your current terms are favorable. Otherwise, again, if you can qualify, you may be able refinance the home.
Today, it is much more difficult to obtain a mortgage. You must be able to show sufficient income to make the payments and pay your other debt obligations and living expenses. You must have had this income stream (which can include your spousal support payments) for at least 3-6 months.
If you cannot qualify to finance the home yourself, your spouse may be willing to remain on the mortgage for a period of time (until it is sold or refinanced). Your spouse may make all the payment, part of it, or none of it, depending on your agreement. Spousal support from your spouse to you may make it possible for you to make the payments directly to the lender. If you enter into this arrangement, you need to be aware that your ex-spouse staying on the mortgage may affect their ability to obtain a mortgage on another property (FHA provides an exception to this “rule”). You are also still living in a property that is partly owned by your ex-spouse, so you need to consider how much this “benefit” is worth as part of your agreement (ie should you be paying some rent?). Also, you may need to take into account who has been paying the mortgage when you divide the proceeds from the sale.
If you have to sell the house, then you may agree that one of you gets to keep the proceeds or that you will share them upon sale. Your agreement should be very clear about such things as how decisions will be made, what happens if the house does not sell in a certain period of time, who will pay for the mortgage, taxes, insurance and upkeep until the house is sold, etc.
If your owe more than the house is worth, and you are in financial stress, then you may be eligible for government assistance to have the house refinanced on terms that allow you to stay in it, or be allowed a short sale (selling the house for less than you owe) or a Deed in Lieu (swap your loan for the house and walk away) with the lender swallowing the shortfall. These options are often better and quicker than foreclosure and if the lender is sensible, can be a win-win for both you and the lender. For more information on the Government’s MHA (Making Homes Affordable) program, click here and also go to our Links page.
There are three legs to determining your eligibility to borrow, and how much you will have to pay.
1. Your Credit Score (FICO score). These range from 450-850, with 850 being the highest/best credit score available. Generally, your score can not be lower than 620 to get a mortgage. FHA/HUD loans are usually used for those with lower scores. Further, FHA is a low down payment loan (as low as 3.5%). FHA loans will only go to a maximum loan amount $406,250. However, note that FHA mortgages carry with them an up-front mortgage insurance payment of 1.75% of the loan, plus 0.55% per year premium. If you pay off the loan within 5 years, you get part of the up-front payment returned.
2. Debt to income (DTI) is a ratio that measures your debt payments to your gross income. It is based on the minimum payment you need to make each month on each of your debts (including the new mortgage), divided by your monthly gross income. The lower, the better. If your DTI is higher than 50%, it will be very difficult, if not impossible, to get a mortgage.
3. Loan to Value (LTV) is the measure of how big your loan will be compared to the value of your home. The more down payment you make, the lower your LTV, which is good. It is very difficult today to get a loan of more than 80% of the value of the property.
Of course, there are many types of mortgages and sources of mortgages. As we know, the variable rate mortgages can be dangerous and this will be particularly the case in the coming years when the interest rates are bound to increase. Commercial banks, private banks and mortgage companies all provide products that may be suitable for your situation. Private bankers and mortgage brokers usually will be able to provide a broader range of options and products.
You should aware of prepayment penalties – i.e. you may be penalized if you want to sell or refinance the house within a certain period of time. Prepayment restriction is usually for 1 to 3 years, if there is one at all. there are two general types of prepayment restrictions. One is that you can sell the house without penalty, but cannot refinance it. The other is that you cannot sell or refinance it without penalty. The penalties are usually the equivalent of 6 months interest.
Finally, you want to be aware of the costs of borrowing/refinancing as these will be added into your loan. You should receive and review carefully the Good Faith Estimate provided by your mortgage broker and question any cost you do not understand. For more information, see MortgageMavin.com.