Written by Ross Garcia, Certified Divorce Lending Professional
Familiarity with the concepts outlined below is a great starting point to get back in the driver’s seat. This is aimed at helping divorcees clarify, and simplify, the critical factors surrounding your home & mortgage decisions.
Retirement accounts. Stock. Personal property. The family home.
Of these hot button issues in divorce, which one would you think tends to be the greatest asset in terms of sheer value? If you said the marital home – you aren’t alone. For a large percentage of Americans, the family home is their most valuable asset.
Despite this, settling disputes involving the family home remains one of the most under-leveraged and misconstrued aspects of the divorce settlement process. Essentially, there are two clear cut ways for decisions to be made about who gets what regarding the house in your divorce.
The first is to work with your spouse to facilitate a mutual agreement. If you can do this on your own, in an online divorce, you will save money and time. However, some spouses may prefer to hire an attorney. Be it navigating your own divorce online without attorneys, hiring a mediator, or paying an attorney, facilitating an agreement is at the heart of the settlement process. Doing so on your own in an online divorce is less expensive.
The alternative to a stipulated agreement in the event neither of you can agree, is that the decision is left in the hands of a judge. A judge that you hardly know.
No one wants to leave their fate in the hands of a judge who has a microscopic view of your life circumstances. The best way to avoid the judge’s forceful hand is to be as informed and prepared as possible.
Arm yourself with knowledge and insight. What factors and limitations am I working with?
Gain awareness of the opportunities specific to your situation. What is the depth of options available to me?
Orchestrate an approach that sets yourself up for a WIN. What is the most practical path forward?
Whatever you do - don’t leave anything to chance.
“By failing to prepare, you’re preparing to fail.”
Home vs. Mortgage – These are two separate and distinct components
The terms home and mortgage might sound redundant to most. Many consider the home and mortgage to be one in the same. But are they? They are the same in the way that assets and debts are the same. In other words, they’re not the same. In fact, they are complete opposites.
Your home, and the equity therein, is considered an asset. The balance on your mortgage – a debt. Both conceptually and in reality; the process for dividing these two items in divorce are utterly different.
They are different in terms of time involved, cost, and most importantly - level of difficulty. The lack of insight into these pieces of the divorce puzzle results in false impressions about what needs to be done, and how to go about doing it.
Here’s an example:
Let’s say you are the “out spouse.” Simply put, this means your spouse is buying out your interest in the house.
You want to transfer title to the property, which is simple. Sign an Inter-spousal Transfer Deed, or Grant Deed, have it notarized and record it with the County.
Voila – you’re off the deed to the house. For all intents and purposes, this is a quick and easy process.
But what about the mortgage? This has yet to be addressed. And this means you’re still on the hook.
The mortgage is a debt, and this debt is a loan. Presumably, this loan is currently held in both of your names. Overlooking this joint obligation can have a severe impact on your post-divorce life.
For instance, if the spouse that was awarded the property fails to make a mortgage payment on time, the out-spouse’s credit is going to be severely impacted if they’re still on that loan. The credit bureaus don’t care who it was assigned to – it remains a JOINT debt.
Ask yourself, do you want to remain joint on a loan with your ex-spouse for the next 10, 20, or 30 years?
The objective for splitting the house should not focus solely on title to the property. That’s easy. Instead, it should also focus on how to transfer the current loan to the in-spouse, i.e. the one retaining the property.
This is most commonly accomplished via mortgage refinance. A refinance is where the additional time, cost, and level of difficultly begins to rear its ugly head.
You might be asking, “Doesn’t someone need to qualify to refinance a mortgage in their own name? How do I know if my spouse or I are qualified?”.
The answer is yes, and therein lies the biggest question that needs to be answered.
First, determine what is possible. Then, determine what is prudent.
The conversation around what is “possible” vs. what is “prudent” are two independent discussions that must take place to ensure the smoothest possible landing.
Imagine a sky diver, so anxious to catapult himself from the plane that he does so on a whim. It’s only on his way down that he decides to begin surveying the terrain for the best possible landing spot.
Does this sound like a rational approach to skydiving?
Perhaps the better alternative would have been to stay in the plane for a while longer and assess the timing of his jump to safeguard the best possible landing spot. After all, this is his life we’re talking about!
The takeaway is this: You can’t decide the best course of action, until you know all the available options.
When it comes to financing the house, the first step is to figure the maximum loan you can qualify for. What is possible?
Be sure to consider several scenarios, such as your qualifications NOW vs. your qualifications post-divorce based on the proposed terms of your settlement agreement.
Leave it all on the table.
All the “what-ifs”.
All your concerns.
Once you’ve done this due diligence, you’ve now set the ‘bar of possibility’ for being able to keep the house. Maybe it’s feasible. Maybe it isn’t. Either way, you’re prepared.
Taking it a step further; what if you qualify, but the new expenses are just too heavy a burden for you to bear?
That’s where the 2nd part of the equation comes into play. What is prudent?
Just because something is possible doesn’t make it a wise decision. At this point, the ball is back in your court. Discuss these possibilities with your financial advisor or divorce attorney.
These educated conversations will allow you to work more efficiently and effectively in your settlement discussions. The result is less time spent pursuing options that aren’t feasible.
In divorce, time equals money. This approach will save you lots of both.
Pre-divorce, or post-divorce? Timing matters.
Despite popular belief, transferring the home & mortgage from one spouse to another isn’t an opportunity reserved only for the newly Unmarried.
This transfer can take place anytime during the divorce process. Just because you’ve filed for divorce and are working through an agreement doesn’t mean that banks or title companies are going to slap the ‘divorce handcuffs’ on you.
In fact, tackling this transfer pre-divorce might not be just another option, it might be the only option. One core example of the need for a pre-divorce refinance or transfer surrounds spousal or child support obligations.
Let’s say you’re keeping the house - you make enough income - and qualifying for a new loan in your name is a sure bet. For now, that is. However, what if the proposed spousal or child support obligations are substantial enough to knock you out of the box and prohibit you from qualifying for a new loan to keep the house? Does this mean that you must forfeit the house and move on?
Not so fast.
This is where a pre-divorce transfer comes to the rescue. The simple solution is such: complete the refinance and title transfer now, prior to support going into effect.
On the flip side, let’s say you are keeping the house and you have no earned income. Undoubtedly, qualifying for a new loan is going to be a stretch. However, the proposed terms of your settlement have you set to receive both spousal and child support on a recurring basis.
This income can certainly be used, but under one major condition. Lenders require that you have received it for a minimum of 6 months before being eligible to use it for income. In such circumstances, a post-divorce transfer is the only real shot.
Timing is everything.
The key is to thoroughly evaluate these parameters EARLY in the process. This proactive approach will help to safeguard the options you’ve laid out for yourself and ensure that each of the opportunities has a chance to see the light of day.
You might ask - what’s the worst that can happen by overlooking these timing considerations, or waiting until the end?
One might be forced to sell the house they hoped so hard to retain. And there’s nothing that can be done to fix it.
Loan assumptions are a rare unicorn
In a perfect world (emphasis on perfect) the requirement to refinance the mortgage into your own name could be bypassed by utilizing what’s known as a ‘Loan Assumption’.
Effectively, your existing mortgage lender would remove your spouse’s name from the current loan. No change in loan terms. No change in payment. No change in interest rate.
In a rising interest rate environment, the benefit of having no change to your interest rate is the primary benefit to a loan assumption as opposed to a loan refinance. In an environment where market rates are significantly higher than your existing rate, this approach makes sense … that is, assuming it’s actually possible.
Loan assumptions are rarely considered by banks. Therefore, we refer to them as “unicorns”.
First, start by calling your existing lender to find out if your current loan is assumable. This is a feature, not a service. The originally Promissory Note will tell you, plain and simple, whether the loan has an assumable feature. If not, move on.
Then, be sure to ask your lender whether qualifying for the assumption is required. Many mistakenly believe that this process is a workaround to poor refinance qualifications. This is false. You must still demonstrate that you have the financial means to make payments on your own. For these decisions, banks use the same blueprint they use to qualify you for a refinance.
Lastly, don’t pretend that a higher interest rate equates to a higher monthly payment. What is your true objective here? Is the goal to keep your payments at bay? Or, is the goal to minimize the amount of interest paid over the life of the loan?
Surprisingly, refinancing an old loan at a slightly higher rate can actually reduce the amount of your monthly payments. Extending the new loan balance into a new 30 year term, despite the rate, can significantly lower your monthly obligations. Therefore, if your goal is cash flow, refinancing might often come out on top.
Don’t spin your wheels pursuing the rare possibility of a loan assumption without first getting these facts in order.
Chances are, you won’t see that unicorn come to fruition.
There are divorce specialists available to help
Divorce is complicated enough in its own right. Mortgages and title transfers - in today’s heavily regulated real estate industry - are complex and burdensome to boot. You need to work with someone that lives at the intersection of divorce, real estate, and finance. Most do not, unless they are a specialist.
A specialist in the mortgage arena is a CDLP (Certified Divorce Lending Professional). A specialist in the real estate arena is a CDRE (Certified Divorce Real Estate Expert). Simply put, experience matters.
Imagine you’re a distressed, innocent client with limited knowledge on the topography of divorce. You walk into your local bank, the bank you’ve been with for years. After all, they know you. They like you. They should be able to help you – right?
Maybe so. But the chances of that banker having handled more than a couple divorce loans in their career is probably slim. Not only might they have a limited purview on divorce lending parameters, but they may have no awareness at all of the divorce settlement process and all of its implications.
This is a recipe for missteps.
Given the sensitivity of divorce (remember, time = money) you can’t afford to make any missteps. Missteps can cost you the house. Missteps can ruin your credit. Missteps can hold you back.
All of this can be avoided.
That’s where a specialist, such as a CDLP or CDRE comes into play. They know the lay of the land. They have hands-on, real world experience working within the confines of a divorce settlement. Their knowledge is current. Their advice – savvy.
Most importantly, they will help you get from point A to point B in the fastest, and most efficient way possible.
If you have any questions about some of the issues brought to light in this article - a CDLP or CDRE can help with that, too. Ultimately, it’s important to know where you stand now - and in the future.
Today’s decisions are tomorrow’s realities.
About the Author:
Ross is a mortgage industry expert, innovator, and entrepreneur.