By Kirk Chivas
There are basically two options when it comes to the marital home: either keep it or sell it.
Sell The Home
Selling the home is often the quickest and easiest way to resolve the issue. This has not been an option in the past as property values were crushed by the housing bubble. However, home values have jumped significantly in the last year and it now may be possible. Read a story from a fellow reader about what it took to sell the family home.
Selling the home is the most orderly way to settle real estate as the market determines the value and proceeds are split based on the proposed terms of the divorce. Both parties are quickly removed from the mortgage liability and have no lingering qualification issues should they wish to purchase a new home.
The challenge with selling the home is the uncertainty of timing, as finding a buyer can happen quickly or may take a few months. Also, the timing of when the divorce becomes final is up to the court system. This means the proceeds from the sale of the home as well as future living arrangements can be in limbo for a period of time and out of your control.
Assume The Current Mortgage
If the marital home will not be sold, having one party assume the current mortgage liability appears to be the most ideal scenario. However, this approach is often the most complicated and convoluted.
We frequently hear, ”I have been the one making the payment and I have a solid job history so I should be able to just have our current mortgage company remove my spouse right?” Unfortunately it is not that easy as this process is viewed more like a mortgage modification than a refinance.
Most mortgages are written with the aim to be sold in the secondary market. Your bank or whoever approved the initial mortgage may have already sold it to another company. Companies that buy of mortgages need simplicity in order to feel comfortable assessing risk.
Removing one borrower reduces the appeal of the asset by the owner of that loan, regardless if the income and credit may be outstanding. It is easier for the note to default with one person as opposed to two. Although this process is possible, a lengthy application process with very unclear time frames makes this approach difficult and uncommon.
There’s another big drawback with mortgage assumption: typically both spouses have equity built up in the property and that means the person who is going to keep the marital home must buy out the equity of the other person. That means coming up with money to pay the other person. Unless the payment can be made from other assets, the most common way of doing this is through refinance.
Refinance The Home In One Name Only
Refinancing means that the spouse who wants to keep the property must be able to qualify individually based on the current mortgage guidelines. Examples of current qualification guidelines include acceptable credit, the individual income has to support the payment and personal debt, and the home must have sufficient equity.
A huge benefit associated with this approach is the process can be initiated prior to any formal divorce proceedings or finalization. Although the mortgage liability can be removed for one of the spouses quickly, typically that spouse is not willing to grant full ownership of the home to the other spouse and nor may one spouse be willing to assume full ownership until all other matters of the divorce have been resolved.
Generally the ownership transfer is not completed until the divorce is final and the marital assets have been split and settled. The transfer of ownership can be handled with either a Quit Claim Deed (generally prepared by the attorneys) or by recording the formal, finalized Divorce Decree issued by the Court System.
Refinancing the home is a very common occurrence as it provides one spouse the comfort of retaining the home and stability for the children. This option must be thoroughly analyzed and discussed with a financial planner to determine if it fits best with your long term financial goals.
Refinancing will also allow the other spouse to have the ability to purchasing a new home quickly and have plans in place prior to or just after the final court proceedings. Sometimes these huge financial commitments are best to be put on hold until after all the dust has settled and you can think clearly.
The family home is often the largest financial asset that needs to be split during a divorce. With so many options and paths to take, it can become confusing on what is the fairest solution for the family. Communication with your attorney, mortgage professional and soon to be ex-spouse is going to be crucial to determine the most practical path or remedy.
About the Author: Kirk Chivas is a licensed Loan Officer and co-owner of First Commerce Financial, LLC, a mortgage brokerage based in Wixom, Michigan. With over 16 years of experience, Kirk has committed to providing Michigan residents with accurate and honest mortgage advice. If you have any questions about your current or future mortgage needs, please feel free to ask Kirk a question over on his website, his Twitter, or on Facebook.