One of the biggest issues we see in divorce situations is who gets the house. In most cases, when the wife has primary physical custody of the young children, she wants to stay in the house. This is understandable as she may want the children to continue in the same school or she simply wants to keep their lives and routines as consistent as they were before the divorce.
While we can certainly understand the desire to keep the house, this decision may present some financial risks for one or both parties divorcing.
Let’s look at some possible scenarios and their possible consequences:
1. The parties agree that the wife will stay in the house and buy the husband’s share of the equity. In situations where husband and wife have similar income and savings, this can be a perfectly viable option. The wife will simply take out a mortgage in her own name, the husband’s name will be removed from the deed, and the wife will pay the husband half of the equity in the home from existing savings or investments.
The situation becomes more complicated when the wife’s income may be significantly lower or if she has been out of the workforce while caring for the children. It may be difficult or impossible for her to qualify for a mortgage in her own name based on her current income (or lack of income). Although lenders will include child support and/or alimony received in their calculations, most will want to see 6-12 months of consistent payments and a court order before considering child support as income. So even if your divorce becomes final next month and the agreement requires you to receive monthly child support, until you have tracked 6 to 12 months of payments, the bank likely won’t include those payments as income for you. Also, many spouses can receive financial support during the separation but before the divorce is final. Because these payments are not subject to a court order, they will also not be counted.
2. Because the spouse who will remain in the home cannot qualify for a new mortgage, it is agreed that this spouse will pay the mortgage and related expenses even if the loan is in the other spouse’s name. This may seem like a reasonable decision at first. In the interest of keeping the children in their home, the spouse whose name is on the mortgage agrees to let her ex live in the house as long as he pays the mortgage, taxes, and insurance. At some point in the future, perhaps when the children are no longer in school, the house can be sold and the equity divided at that time. There are some potential pitfalls with this scenario.
First, the spouse who will not be living in the house may want to buy another house one day. While some people with high incomes may qualify for a second mortgage, most people will not be able to get a loan to buy a new home if they still have a mortgage on their first home.
Second, what happens if the spouse who lives in the house falls behind on the mortgage payment? Or, worse yet, does he stop paying for it altogether? Although the divorce agreement may explicitly state that the spouse in the home is responsible for paying the mortgage, the lender only acknowledges the name on the note. If there is a delinquency or even a foreclosure, it will affect the credit of the spouse whose name is on the mortgage. Because there are no adverse consequences for late payments by the spouse in the house, he or she may decide to pay other expenses first, knowing that the late payments will only affect the exes.
3. One spouse insists on keeping the marital home, so the other spouse ends up with most of the savings, investments, and retirement accounts. This is another common situation we come across. I have seen many divorce agreements that divide all marital assets equally, but one spouse ends up with mostly liquid assets (like savings accounts, stocks, mutual funds) and the other ends up with the house, which is very illiquid. If the spouse who keeps the house has little or no emergency fund or backup savings, he is really playing with fire. An adverse event such as a job loss, disability, or major home repair can ruin them financially. If you decide to give up other, more liquid assets in favor of keeping the house, be sure to plan for unforeseen problems that inevitably seem to occur.
The point here is to consider all the “what ifs” that might occur in the future before making a decision about what to do with the marital home. It is often your greatest marital asset, so think through all the pros and cons before you sign your agreement.