When a marriage falls apart, the spouses are forced to decide what to do with their family home. Their home is usually the largest asset they share. Unfortunately, because it’s not a liquid asset, dividing it poses challenges.
Many divorcing couples neglect to consider all of the factors that should be taken into account when deciding what to do with their house. As a result, they set themselves up for major headaches during the settlement negotiations, and even years after their divorce is finalized.
It’s worth consulting a divorce attorney for advice. He or she can offer suggestions based on years of experience handling divorce cases that involved the division of marital property. Having said that, we’ll present some of your options below. Whether you or your spouse decide to keep your marital home or sell it and split the proceeds, the following discussion should prove useful.
Should You And Your Spouse Sell Your Home?
The simplest approach would be to sell your house. You and your soon-to-be ex would then use the proceeds to pay off the mortgage. If there’s any money left over, it would be split down the middle. (Note: there may be capital gains taxes due on the sale, depending on your circumstances. Consult a tax consultant to learn whether this is the case and to minimize your end-of-year tax bill.)
There are a couple of scenarios that might dissuade you from taking this route. First, you or your spouse might want to continue living in the house. A lot of divorcing couples confront this issue when they have kids and want to avoid upending their environment. With other couples, one party may feel emotionally attached to the property and wish to keep it rather than put it on the market.
A second scenario is that the housing market may have cratered since you purchased your home. If you’re unable to attract the price you want for your property, it might make sense to hold onto it until the market recovers.
But bear in mind that keeping the home – even if temporarily – can cause major headaches for both parties. For example, if the person who is responsible for paying the mortgage misses a few payments, both parties’ credit scores can be negatively affected.
To avoid such problems, the person who is not responsible for making the payments should have his or her name removed from the mortgage loan. Unfortunately, doing so is not as simple as it sounds.
Refinancing The Mortgage Loan Under A Single Name
Lenders will not simply remove a name from the existing mortgage. The loan was extended to the couple based on their combined creditworthiness. Removing one of the names changes that formula.
The solution is to refinance the loan in the name of the person who intends to continue making the payments. There are a few potential hurdles. First, there must be sufficient equity in the property. The outstanding balance of the loan cannot be greater than the house’s market value.
Second, one of the spouses must be willing to give up the property. If both parties want it, they must settle the issue before refinancing the loan under a single name.
Third, the person who intends to stay in the house must be considered a reasonable credit risk before a lender will agree to refinance the loan. Creditworthiness is often the biggest obstacle for individuals going through a divorce.
Potential Problems With Refinancing After Divorce
Many individuals declare bankruptcy after their divorce is finalized. Unfortunately, doing so can create a number of problems that make it difficult to refinance an existing mortgage.
Most mortgage lenders avoid taking bad risks. Hence, when a borrower declares bankruptcy, they often balk at refinancing his or her loan. The good news is that few lenders look forward to foreclosing on properties. Given a choice between refinancing a loan or watching the homeowner abandon his or her house, many lenders will choose the former.
If a lender refuses to refinance, both parties on the mortgage are likely to take a hit on their credit scores if the home goes through foreclosure. For that reason, it is always a good idea to work out issues related to refinancing before going through divorce. Contact an experienced divorce lawyer who can offer advice that helps to streamline the process.