Divorce is difficult for so many reasons. To avoid making it harder than it has to be on your finances, it helps to understand the way mortgages are handled as you divide assets.
Whether you are thinking about keeping your current home to provide stability or considering a move to get a fresh start, there are things you should know to make the process easier.
In addition, there are important timing issues for getting things done smoothly. Different rules and regulations come into play after you officially file and once the marital settlement is finalized. The earlier you talk to us, the better.
Should I Stay?
If either party is considering keeping the couple’s current home, there are several things to be aware of before fighting that battle. Sometimes people argue over who gets the house before realizing they can’t afford to keep it anyway.
Whoever stays in the home will need to qualify for the mortgage amount on their own now. So even if you easily qualified for your home mortgage initially, you may no longer have the income and credit history to qualify for a mortgage as an individual.
Avoid this headache by meeting with a mortgage lender and reviewing your eligibility. Just like any other time you go house hunting, it’s important to get pre-qualified for a home loan so you have a better understanding of what mortgage value you can expect to be approved for when the time comes.
Also, it’s advised that, if one person chooses to stay in the home, terms are written into the marital settlement requiring that the mortgage gets refinanced into the individual owner’s name within 90 days (or some other agreed-upon limit) of the divorce being finalized, or the house would be listed for sale. Sometimes people drag their feet because interest rates aren’t where they want them to be. However, the loan remains on the other party’s credit so long as that original loan is in place. This is important because, if the person staying in the home misses payments or defaults on the loan, it will continue to affect the non-resident spouse until their name is off the mortgage.
TIMING TIP: Once you have filed for divorce, financing gets put on hold until the marital settlement is finalized, which can sometimes take years.
If you haven’t filed for divorce yet, either spouse can refinance the mortgage in their own name if the other spouse signs off. The person taking on the mortgage needs to qualify based on all debt for both parties. If there is enough equity in the home, the new loan can be used to pull some cash out by the other spouse for their own home. Again, that spouse also needs to qualify individually based on the combined financial situation.
If you have already filed for divorce, then any transactions have to wait until the marital settlement is finalized AND sometimes require an additional waiting period based on terms for alimony and child support.
Setting Yourself Up for Success
There are a variety of steps you can take to make this process easier:
- Make sure both parties have copies of all important paperwork. For the next few years, you will both need copies of your joint tax returns and W2s. Photocopies are acceptable. It will make everything more difficult – and could cause delays – if you don’t have these documents available.
- Learn about your finances. If you weren’t the one who managed your family finances, then be sure to get that figured out as soon as possible. Your attorney, accountant, wealth manager, and banker can all help you get up to speed.
- Negotiate from a place that makes sense financially. What you want from an emotional standpoint may put you in a bad place with your finances. Talk to your team of advisors about what is realistic. As I explained earlier, you might want the house, but if you can’t afford it, you may put yourself in a worse financial situation than if you negotiated for something else more realistic, such as retirement funds. You may want to meet with a mortgage lender before the marital settlement is finalized so you understand your options going into your negotiation.
- Understand the terms of your marital settlement. There could be requirements and waiting periods built into the settlement that impact your ability to move forward. For instance, if child support is part of the agreement, there is often a six-month waiting period before those funds are allowed to be figured into your income. That means most banks will put financing on hold until there is a history of successful receipt of payments. Don’t assume that you can move forward on a mortgage (or any loan) once your divorce is finalized.
- Treat your team like true partners in the process. Share your story. We won’t judge. The more we know about your entire situation, the better we can help you and provide realistic options. Like a physician performing personal examinations with compassion and confidentiality, lenders have “seen it all” and want to help you survive this difficult time. In fact, we may be able to offer suggestions that you may not have considered, to give you the best chance for financial health and stability down the road.
We’re Here for You
In truth, we want to help you navigate this process and come out the other side stronger and ready to face your new financial future.
If you would like more information about your mortgage options during a divorce, call me at State Bank of Cross Plains at 608-826-3513.