Experts on divorce and separation
Once a quarter we will have a guest author: an expert in their field, or a qualified divorce professional, or a well known writer, who will share an article or insights on a divorce related topic. Nothing written constitutes as legal, financial or therapeutic advice.
Homeownership and Divorce:
Five Tips for a Successful New Start
By Douglas Katz, MBA, CDLP
Census data shows that roughly 70% of married couples own a home. Unfortunately, the same census data shows that many of these marriages end in divorce. With many marriages ending in divorce, it has become increasingly more important to understand the complexities of how homeownership should be handled during this time. While many times couples may think the disposition is cut and dry, there are some important considerations for all divorcing homeowners to consider early in the process.
1. YOUR CREDIT
Do not trash your credit. The ability to finance a home hinges on credit. Sadly, credit can often be a casualty of divorce due to factors like the responsibility of payments on bills, the mortgage, cost of the divorce, etc. Divorcing couples should avoid anything that could damage their credit rating. While a lender can be empathetic to their situation, underwriters cannot subjectively evaluate a borrower's credit profile. The score is the score and any derogatory aspects are considered when obtaining home financing.
2. YOUR INCOME
Your income can be more complex than you think. While seemingly simple, income is anything but simple when it comes to mortgages. Income types are evaluated differently to fully assess lending risk. Variable income such as commission based, for example, can require a two-year work history to be used in the mortgage process. Since often divorce can bring with it re-entry into the workforce, divorcing couples need to consider how much income of their income will be used to help qualify for a mortgage or if the income from a new job can be used at all.
3. MAINTENANCE: ALIMONY AND CHILD SUPPORT
If a divorcing individual is getting any sort of alimony, child support or unallocated support from the departing spouse this is referred to as maintenance. Maintenance is important to disclose as each type of support is evaluated differently for qualification purposes when attempting to obtain home financing. To have maintenance be considered as a part of the mortgage approval process there are specific requirements to follow about how long the payments have been received and for how far in the future the payments are expected to continue. This requirement is informally known as the 6/36 rule. This rule states that a prospective borrower needs to be able to document a 6-month history of receiving payments and proof that the payments will continue for at least 36 months to determine if the maintenance will be used for mortgage approval.
4. OWNERSHIP AND TITLE
Ownership and titling can make or break a deal. It is tempting to try to move things along quickly, but this can hurt you in the long run. For example, if the departing spouse Quit Claims their ownership on the home prior to the divorce resolution, they reduce the options for the remaining spouse to refinance the property. In extreme cases, this may eliminate the opportunity to refinance at all.
5. HOME EQUITY
Often, a buyout is the desired resolution for the marital home, but divorcing couples need to take a realistic view at the home equity. For example, the solution is to have one spouse buyout the other spouse. The cost of the sale need to be entered into an equity calculation so that the spouse who is retaining the property is not shouldering the entire cost of the sale when it should be split.
As you can see, deciding what to do with your home goes beyond deciding what to do with the physical structure. You need to consider how external and internal complexities will impact your ability to have options with the home after divorce. The best thing to remember is to get help from qualified professionals early in the process so you can be assured the ability to have a new home and a new start.
About the Author: Doug is a 16 year veteran of the mortgage industry who specializes in serving homeowners and buyers during and following a divorce. Throughout his career, he has consistently used his expansive knowledge, practical experience, work ethic, and exceptional customer service to help his clients achieve their goals. Doug also regularly works with and provides continuing education classes for some of the top divorce professionals in the Chicago area. He is co-author of the Stress Free Divorce Volume 3. Doug graduated from the United States Military Academy at West Point with a Bachelor’s Degree in Behavioral Science and Leadership Management. He is also a graduate of Loyola University Chicago where he earned his MBA.