One of the most complex questions in litigation or mediation is, “Should I try to keep the house?” This calculation requires accurate financial analysis prior to negotiation to evaluate whether (or not) it’s a worthwhile want. Because the marital home is such an emotional trigger, it often leads clients to override logic with wishful thinking—“Yes, I think I can pull it off.”
Let’s look at two basic dilemmas involving who gets the house:
- There is insufficient total community assets to give to the other spouse, in lieu of their share of the property’s equity
- There is an existing mortgage on the property held in joint names
Both scenarios require that the party who wants to retain the house obtain financing to equalize the assets that will go to the other party. If there is an existing mortgage, most couples don’t realize that the bank will not allow them to simply “remove their spouse from the loan.” She or he will have to qualify on their own, within a reasonable period of time (as specified in the marital settlement agreement).
Recently I posed some questions I have received from clients to Adam Eyre of Prime Lending to clarify some of the key areas of confusion.
Client Question: A condition of being awarded the house is that I remove my ex from the loan, which means I will need to refinance and qualify on my own. My home is worth $1.5M but I only owe $400K. Why would I need to show income to qualify?
Adam Eyre (AE): Lenders cannot just rely on the equity of the property. They need to establish a borrower’s ability to repay the loan (credit history and income).
What qualifies as income for mortgage purposes?
When lending, qualifying income has to be considered stable. This means a lender will typically want to see an income and the likelihood of its continuance. Lenders also want to see stable employment history that demonstrates future employability.
Examples of income streams:
- Dividend, interest & capital gains income: verified by 2 years of tax returns. Statements proving that the assets used to generate this income are still in existence to continue the level of income moving forward must be provided.
- Social security & pension income: documented for at least three years moving forward.
- Asset depletion: some lenders will allow you to use your asset value (cash and its equivalents, investments, retirement plans, etc.) to create a hypothetical income stream. This is very helpful for individuals who don’t have current income but have significant assets.
- Alimony and child support: As documented in a marital settlement agreement. To show stability, borrowers will typically need at least six months of cancelled checks.
Client Question: Why do I have to take my ex off of the loan?
AE: Your ex will want to be removed because their credit standing is at risk if you miss payments. They are still responsible for that loan. They may not qualify to purchase their own property if your loan payment shows on their credit report.
Client Question: What do you mean I can’t qualify for the refinance or the purchase of a new property? I just refinanced a year ago with no problem.
AE: Now that you are divorced, you have monthly alimony and child support to pay that’s factored into the calculation of your monthly income against your monthly payments. This can cause your debt-to-income ratio to be too high.
If Jane is the money maker and wants to buy a new place after the divorce, the purchase can take place prior to showing court-ordered payments of child support or alimony. John will remain on the title until the divorce is complete when the transfer of equalizing assets is complete. John can then execute a quit claim deed removing himself as an owner. This transfers his interest to Jane. If they wait until after the divorce is complete when Jane has alimony and/or child support payments to consider, she may not qualify for that same home.
Do you know someone who has made an expensive mistake in their divorce settlement?
A Certified Divorce Financial Analyst can save you from possible financial disaster. Using sophisticated software, and a network of trusted allied professionals, a divorce financial planner can provide you with the precise calculations that prevent you from negotiating for something that is financially unsound.