WHAT HAPPENS TO THE HOUSE IN A DIVORCE?
Dealing with issues related to the family home is often a major consideration in a divorce. Below is a discussion of some of the issues divorcing spouses may have to deal with when faced with the question “What happens to the house?”.
Allocating the equity in the home
Usually, the equity in the home is allocated between the parties in some fashion. If one spouse will remain in the home, the other spouse often receives other assets of approximately the same value as the equity in the home. If the spouses do not own sufficient assets substantially equivalent to the amount of equity in the home, they may need to come up with some other way to buy out the spouse who will not be retaining the home. If there is sufficient equity in the home, one option may be to have the spouse who is retaining the home execute a cash-out refinance of the mortgage and pay the other spouse an amount equivalent to his or her interest in the home after payment of refinance fees and commissions.
If the mortgage balance is higher than the value of the home, the parties may need to explore whether a short sale is a viable option. If not, the parties should communicate with their mortgage lender whether the lender will forgive some or all of the remaining balance after the sale. If not, the house may need to be sold and the parties may need to split any remaining liability to the mortgage lender.
In some cases, the parties will need to sell the home. After payment of real estate commissions, fees, taxes, liens, and the balance of the mortgage, the proceeds may be used to pay marital debt or may be split between the parties in some fashion. The split may be equal or unequal depending on the circumstances of the parties and the other assets and liabilities being allocated between the parties.
In a real estate market that is trending upward, the parties may consider postponing any sale of the home until property values rise. In this event, the parties will need to determine who will live in the home and who will be responsible for taxes, insurance, payment of the mortgage, upkeep, maintenance, etc.
In a slow market or if the parties need the sales proceeds in order to afford alternate housing, listing the property as soon as possible will likely make the most sense.
If the parties agree to sell the home, they should try to work together in selecting a realtor, deciding on fix up projects to obtain a higher sales price, etc. Often a default mechanism is included in such an agreement so that if the parties cannot agree on a specific item, the real estate broker or some other neutral third-party will cast the tie-breaking vote.
Paying the mortgage after divorce
In dividing marital property, Colorado courts must consider “the desirability of awarding the family home or right to live therein for reasonable periods to the spouse with whom any children reside the majority of the time.” However, other considerations often come into play in determining whether one of the spouses should keep the home, primarily whether the parties can afford to keep and maintain the home with the added expense of a second home for the other spouse. If one of the spouses is a high earner, he or she may be ordered to continue paying some or all of the mortgage for the other spouse for a certain period of time or until the mortgage is paid off.
If the mortgage is in both spouses’ names, the transfer of title from one spouse to the other does not affect both parties’ continued obligation on the mortgage. Typically, the only way to remove one of the spouses from the mortgage is through a refinance. As long as both parties remain on the mortgage, the lender may pursue either party for payment of the mortgage and both parties run the risk of damaging their credit score if payments to the lender are missed or late.
It is possible that the party retaining the house cannot qualify for a refinance on his or her own. Additionally, the interest rate or other terms may not be as favorable as on the existing loan. In these circumstances, either the parties will need to agree on how the home will be titled, who will live in the home until the mortgage is refinanced or the home is sold, and who will be responsible for paying the mortgage, taxes, insurance, upkeep, maintenance, etc. until the house can be refinanced or sold. Additionally, an agreement whereby the party responsible for paying the mortgage, taxes, etc. must indemnify the other party for any losses associated with the responsible party’s failure to make these payments is advisable. If these issues cannot be worked out, there may be no choice other than to sell the home.
Buying a new house if you’re still on the old mortgage
It is possible that the spouse who moved out may be able to qualify for a mortgage on a new home even if he or she is still on the old mortgage. The moving spouse should ensure that the divorce decree clearly states that he or she is not responsible for payments on the old mortgage. If the divorce decree requires the spouse retaining the home to refinance the mortgage within a certain amount of time, the moving spouse should enforce that clause of the decree. If the divorce decree does not mention who is ordered to pay the mortgage, the moving spouse should request that the decree be amended to show which party is responsible for the mortgage.
To qualify for a mortgage on a new home while remaining liable on the old loan, the new mortgage lender may want to see that the other spouse has timely made all mortgage payments for the most recent twelve months. The moving spouse should provide his or her mortgage lender with the divorce decree and twelve months of canceled checks showing that the paying spouse has made the mortgage payments as required. If this is not possible, the new lender may accept, in lieu of canceled checks, a letter from the moving spouse stating he or she has not made the payments on the other mortgage and, per the divorce decree, is not obligated to make them. If the former spouse has made the payments on time, this might be sufficient.
Purchasing a new home – how maintenance (alimony) affects underwriting
If the moving spouse is receiving regular maintenance payments and wants (or needs) the mortgage lender to consider these maintenance payments in qualifying the moving spouse for the loan, the mortgage lender will usually want to see that the court has actually ordered the paying spouse to pay maintenance. Otherwise, the receiving spouse may not be able to force the paying spouse to continue paying maintenance into the future.
Most mortgage lenders require at least twelve months of timely past maintenance payments and at least three future years of court-ordered maintenance to count the maintenance payments in qualifying the moving spouse for the mortgage. The receiving spouse should deposit the maintenance payments directly into a bank account each month so the mortgage lender can see a paper trail proving reliable payment. The receiving spouse should also make copies of the checks prior to deposit to prove the source of the deposit.
What if the house is the separate property of one spouse?
If one of the spouses owned the home prior to the marriage and never conveyed an ownership interest in the home to the other spouse, the home may be considered that spouse’s separate property. In that event, the court does not have authority to award the home to the other spouse in the divorce. However, the court may consider the owner spouse’s ownership of the home as a financial consideration in determining an equitable allocation of the parties’ marital property. Additionally, any increase in the value of the home during the marriage is considered a marital asset and can be divided in the divorce.
What happens to the house in a divorce depends on a variety of factors. The above discussion addresses some of the more common issues divorcing couples face regarding the family home.