Divorce and the Marital Home
One of the biggest financial (and emotional) decisions to be made during a divorce is deciding what happens to the marital home.
Option 1: Sell the Marital Home to a Third Party
If neither spouse wants the house (or neither can afford it), then it must be sold to a third party. Each of you moves to a new, separate dwelling. While this may not be as simple as is sounds, the major decisions to be made generally include:
- When will the house be put on the market; what needs to be done to make it market ready and who will do that work; choosing a listing agent; deciding on the asking price; handling open houses and visits by prospective buyers; agreeing on a presented offer.
- When both spouses (and children, if applicable) will be out of the house so the new owner can move in.
- How the utilities, insurance, and upkeep will be paid for until the house is vacated.
- How the proceeds from the sale will be allocated to you and/or your spouse.
Option 2: One Spouse Buys the House
If one of you wants to keep the house, then the process can become more complicated. Arrangements have to be made so that the spouse keeping the house becomes the sole owner and has the mortgage, if one is needed, solely in his or her name.
The timing and method of the title transfer (ownership) and the refinancing (getting the mortgage in one name) have to be carefully coordinated to prevent problems for either party down the road.
Removing One Person from the Mortgage Without Refinancing
Sometimes a bank will let one person’s name be removed from the mortgage liability without refinancing. This is a very good and affordable option, but it just does not happen very often. Usually the name being removed from the mortgage was not an income provider (such as a stay-at-home mother). This generally costs only $1,000.
However, removing the name from the mortgage does not remove that person’s name from the title of the home.
Using a Quit Claim Deed as a Transfer of Title
A written document is always required to legally transfer ownership of property from one person to another. There are several types of documents that can be used to do this. One way is through a quit claim deed. (Sometimes people call this a “quick claim” deed, but that is inaccurate.)
One caution about the quit claim deed is that it only conveys a legal interest in the property. It does not warrant, or verify, the good state of the title. It has no impact on the existing mortgage. If past issues of title transfer come to light in the future, the person who now thinks he or she owns the property may have to go through a legal process to finalize ownership.
My Strongest Recommendation: Do not take your name off the title (the deed) until your name is also off the mortgage. In the unlikely event that your spouse dies after you sign a quit claim deed but before the joint mortgage is refinanced, you will still be responsible for a mortgage on a house you no longer own.
How Mortgage Refinancing Usually Works During Divorce
Refinancing a house during divorce is usually done to pay off the current mortgage that’s in both names. Then a new home loan is obtained by the spouse who is keeping the house. That spouse becomes the only one financially responsible for the mortgage.
As discussed above, transferring title to the sole owner is a separate legal process. The quit claim deed is part of the refinance process. At a point very close to finalizing the refinancing, the bank will need the signed (but not yet executed) quit claim deed. After your name comes off the mortgage, the bank will then execute the quit claim deed and file the new deed with the county.
Sometimes the quit claim deed is held in escrow by an attorney that is not part of the bank’s refinancing. That attorney can send a letter to the mortgage lender bank and alert that he/she has the signed document. When the name is off the mortgage, then that attorney will file the hew deed.
Key Points About Refinancing a Home Mortgage
Credit Record:The person seeking refinancing must have good credit. His or her amount of existing debt is considered.
Fees: As with the initial mortgage, refinancing involves a variety of bank fees that are usually added to the amount being financed. To estimate these charges in your situation, myFICO provides a refinancing cost calculator.
In addition, attorney fees may be involved for the transfer of title on the deed.
What the Mortgage Lender Will Consider in a Divorce Situation
- Child support and spousal maintenance are considered debts in terms of your debt ratio when determining whether you are eligible to refinance.
- If the staying or leaving spouse is paying child support or alimony.
- Child support is usually counted as income after 3-6 months.
- Spousal maintenance is usually counted as income after 3-6 months.
- The mortgage lender usually wants to see a final legal separation document or divorce decree to finalize the transaction.
How the Leaving Spouse Receives His/Her Share of House’s Equity
The bank will do an appraisal of the house to obtain its current fair market value. Then the current mortgage balance and refinance fee are subtracted from the market value to determine the house’s net equity. As an example:
- Fair Market Value (usually set by the bank): $150,000
- Subtract Current Mortgage Balance (as of when one party leaves): $100,000
- Subtract Refinance Fee (set by bank): $4,000
- Current Net Equity in House: $46,000
The net equity is most often divided 50/50 to determine the leaving spouse’s share of the house’s equity. Most often the leaving spouse’s share is paid for by adding it to the new mortgage.
In above case, the staying spouse has to increase the mortgage by $4,000 to refinance (unless other arrangements are made with the leaving spouse) and $23,000 to cover the leaving spouse’s equity.
That adds $27,000 to the mortgage needed.
Thus, the staying spouse must be able to qualify for a new mortgage of $127,000. The longest term of the mortgage (30 years) will keep monthly payments as low as possible.
Option 3: The Leaving Spouse Stays on the Mortgage
It is not unusual for the leaving spouse to stay on the mortgage for a specified period of time after the divorce is final, for one or more reasons:
- The staying spouse needs to stay a few months until his/her child support and alimony can be counted as income. Then that would allow the staying spouse to qualify for a mortgage.
- The staying spouse may want to stay to allow a child to finish the school year.
- The staying spouse wants a short period of time to decide to sell or refinance.
In this case:
- The separation agreement/divorce decree specifies the length of time such as 24, 36 months, etc.
- The leaving spouse is given a legal form of an IOU (specifying the defined payment schedule and due dates) for the equity that is owed at the time of the leaving.
- The leaving spouse has protection in the agreement that, for as long as his/her name is on the mortgage, if the mortgage is late (even once), the leaving spouse may order the house to be sold (for example, to avoid damage on his/her credit score.)
- The leaving spouse typically does not benefit from the future sale price. This is because the staying spouse, going forward, pays the mortgage and is responsible for all maintenance and care of the house.
Death of Either Party Before or After Divorce When House Still Co-Titled and Co-Mortgaged
During marriage, the co-title is referred to as joint tenancy or tenancy-by-the-entirety. When one person dies, the surviving co-owner (in this case, the spouse) gets the entire value and ownership of the home.
After divorce, the house’s title automatically changes to tenancy-in-common. In this case, each ex-spouse would own an equal share, but neither of you receives the other party’s shares if the other party dies. Each’s specific share of the home is directed according to his or her will.
This may not be the result the divorcing couple wants.
The options for managing the different situations that can arise under these circumstances are best explained by your mediator.
In any event, it’s critical make sure your wishes can be carried out after your death. Be sure to update your will as soon as possible following your divorce.
Photo credit: CanStockPhoto.com
This blog and its materials have been prepared by BJ Mediation Services for informational purposes only and are not intended to be, are not, and should not be regarded as, legal or financial advice. Internet subscribers and online readers should not act upon this information without seeking professional counsel.