A side from child custody, the most emotionally charged issue in a divorce is usually who gets to keep the house. For most couples, a house is their most valuable asset, and it has enormous symbolic value as well.
But while couples often fight over who gets the house, keeping the house isn’t always the best plan, either legally or financially. In some cases, the better route is to jointly sell the property, split the proceeds, and then buy or rent a smaller home. Most people going through a divorce would be wise to at least consider this option.
As an example, let’s say Jason and Elaine are getting divorced and deciding what to do about their house.
If Elaine wants to keep the property, Jason will almost certainly take his name off the mortgage – that’s because he’ll want to avoid any chance of being held liable for the debt. That means Elaine will have to refinance the mortgage in her own name.
So Elaine will have to consider whether she can afford the payments, and even whether she can obtain a mortgage based on her income alone. This could be difficult, because most banks have been legally required to adopt much tighter lending practices than they had before the financial crisis a few years ago. It could especially be a problem if Jason had a better credit history and was helping to raise the couple’s credit score.
Perhaps Elaine is going to be receiving alimony or child support from Jason. Even if that’s true, most banks won’t consider these types of payments as a part of borrower’s income unless the person has already been receiving them regularly for at least a year – and unless the divorce agreement requires them to continue for at least three years in the future.
Maybe Elaine was the primary bread-winner and will be paying alimony or child support to Jason. If so, she’ll need to remember that most lending decisions are based on the ratio of the loan amount to disposable income – and her alimony and child support payments will significantly reduce her disposable income.
Jason might consider keeping his name on the mortgage at least temporarily if it means that Elaine can stay in the house and not have to sell it right away. This might be a good idea in order to avoid suddenly disrupting the children’s routines, schooling, and social lives, or if the house needs some updating in order to fetch a good sales price.
But this is risky, because if Elaine defaults on the mortgage payments, Jason could be on the hook. And even if Elaine makes all the payments on time, Jason’s credit could still be affected because the loan amount will continue to appear on his credit reports.
Another thing Elaine will have to consider, beyond the mortgage, is the other costs of owning a home, including property taxes, homeowner’s insurance, utilities, maintenance, and so on. These costs won’t go down after a divorce, even though there will now be only one spouse contributing toward them.
If Elaine decides to keep the house, and “buy out” Jason’s share with other material asset, she would be wise to treat this the same as any other real estate purchase – just as if she were buying the house from a stranger.
That means she should get an appraisal and be certain to the home’s market value. She should also get the house inspected, and find out how long it will likely be before she has to repaint, repair the roof, fix the heating and air conditioning systems, etc. She should find out if there are any signs of termites or other problems, and arrange a title search for unexpected liens. After all, once she “buys” the house from Jason, she can’t undo the sale later.