Mortgage Loans and Divorce – What Couples Should Know About Their Largest Asset

Divorce can be a life changing and overwhelming experience for many people. Approximately half of marriages end in divorce, and for many, the process of going through a divorce is one of the most difficult experiences in their lives up to that point.

Much of the stress associated with a divorce is related to the fact that the process can feel uncertain and unpredictable. There is perhaps no financial decision made during a divorce that is more impactful than the disposition of the marital home.

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For many married couples, the decision to purchase a home is the largest financial decision that either individual has ever made. Most married couples that do own a home have obtained a mortgage, either together or separately, to purchase the home. A mortgage is a large financial commitment that usually comes with a 15-30 year financial obligation. Given the gravity of that financial commitment, it is important to be informed and knowledgeable about the financial consequences of how your home is disposed following a divorce. Additionally, what actions you take during the divorce can be crucial to how you may be positioned to receive the relief you are seeking in your divorce.

One factor often overlooked by many is the decision of whether to leave the marital home before the divorce has concluded. Often, the best decision is to remain in the home while the divorce is pending. There are exceptions to this general rule. For example, if there is domestic violence in the home, or if there is a concern that the other spouse will seek out a protective order based on false accusations, leaving the home may be the best decision. However, this decision should be carefully planned and thought through with appropriate legal advice as it can have wide implications affecting temporary spousal support, child custody, visitation and child support, as well as the motivations of both parties to settle outside of court.

Often, one or both spouses are unsure or do not understand what their options are regarding  disposition of the marital home during a divorce. Many spouses mistakenly believe that they cannot be awarded the home due to the fact that the mortgage is in the other spouse’s name. In reality, it is often possible for either spouse to be awarded the home in a divorce regardless of how the home may be titled, or even which spouse is obligated on the debt. What is most important is that however the home is disposed, that your interests are properly protected and that the disposition of the home is handled in a fair way.

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Many people focus far too much on which assets they want to receive out of the marriage and not enough on how those assets affect the person who receives them. Although receiving the home in a divorce sounds like a win, there are consequences to home ownership. If one spouse receives the house, that person will likely now be responsible for the monthly payment, taxes, home insurance and all the maintenance costs associated with the home. This can amount to tens of thousands of dollars in yearly expenses. One of the first questions that should be considered regarding the marital home by any person contemplating divorce is whether either party can afford to keep the home after the divorce.

If neither party is able to individually afford the home, selling it may be the only option. In the event the home is ordered or agreed to be sold, it is usually advisable to get the home on the market and sold for fair market value as quickly as possible. If the home is agreed or ordered to be sold, there should be a clear understanding of who bears the responsibility for the monthly expenses and maintenance on the home before it is sold.

If either spouse decides they want to keep the home, and has ultimately decided that he or she can afford to do so, there are other matters to consider. The mortgage may need to be refinanced. If the person receiving the home is the only person obligated on the mortgage debt, refinance may not be necessary. However, if the mortgage was obtained in both spouses’ names, the person who does not receive the home will want to ensure that they do not remain legally obligated on the mortgage.

Failure to address the mortgage debt can lead to terrible consequences for the spouse who does not receive the home in the divorce. Credit ratings can be damaged and a spouse’s ability to borrow or purchase a new home can be negatively impacted for years to come. Requiring a refinance will work to avoid these problems. It is also necessary to include a requirement that the house be sold if the receiving spouse is unable to refinance the home after a certain time period following the divorce. Usually, 90 days will be a sufficient time to determine whether a spouse will be able to refinance the home.

The requirement of refinancing the mortgage, or sale of the home, allows the original mortgage to be paid off to remove the other spouse from any indebtedness. In the event of refinance, a new mortgage agreement is made which effectively leaves only the spouse that is receiving the home on the mortgage.

A new deed should also be prepared to remove the other spouse from any legal ownership of the property. If the home is being refinanced, a new deed is often prepared in conjunction with the refinance, but it is important to communicate the terms of the divorce so that the deed is prepared properly during refinance. Usually, a quitclaim deed is prepared and would be signed by the spouse that is transferring his or her ownership in the property to the other spouse.

In addition to removing debt from the name of the other spouse, refinancing can be used as a way to “buy out” the home from the other spouse. In order to understand a fair price to buy out the other spouse, it is important to understand not only what the home is worth, but what equity, if any, exists in the home. For example, if the home is worth $400,000 and the couple owes $300,000 on the mortgage, there would be $100,000 equity in the marital home. If the divorcing couple agreed to divide the equity in the home equally, the buying spouse would need to pay $50,000 to the other spouse in order to buy out the other’s equitable share. If the buying spouse does not have $50,000, this amount may be able to be borrowed at the time of refinancing the home so that the other spouse receives $50,000 at the time the home is refinanced.

There are many factors to consider when determining whether to sale the marital home, refinance the home, or pursue some other settlement or agreement regarding the disposition of the home. Which choice is made can have lasting financial consequences and it is important to discuss this with a family lawyer experienced in these matters early on during your divorce.

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