Recently, I’ve been asked by many Realtors and Attorneys to help finance a client looking to buy another property after or during their divorce …
Because of the frequency of this scenario, I’ve been reminded that there’s a large amount of misunderstanding and erroneous information surrounding this delicate topic.
Below are some examples of the “divorce scenarios” I’ve seen most often:
- One, or both parties, are looking to “move on”. Depending on the Divorce Settlement Agreement, scenarios include:
1. Selling the house, splitting proceeds, and buying their own separate properties.
This one’s the easiest, assuming there is Equity to split and that the home sells. The existing mortgage gets paid-off at Closing.
The Note is paid-in-full and proceed checks are cut to each party at the Closing. Each spouse can then apply/qualify for a new Mortgage for a new purchase, (should they decide to buy) without any debt from the former home.
2. The next scenario: One spouse wishes to stay in the house. That spouse wants to “buy out” the other spouses’s interest in the home.
That scenario, requires sufficient Equity to allow for a REFINANCE of the marital home … AND Equity to “cash out” enough money to satisfy the EXITING spouse and their agreed-to share of the marital property.
Mortgage Balance: $100,000
Home’s Current Value, as determine by the Appraisal: $200,000
New Mortgage Amount (typically 80% of Home’s Value) $160,000
New Mortgage pays-off previous Mortgage Balance of $100,000 …
Net Amount: (Less Closing Costs) $ 60,000
Equity is determined to be $100,000 (the difference between Appraised Value and Outstanding Balance.) Half of that Equity is $50,000. The Loan above allows for the proceeds of $60,000 (minus Closing Costs) to pay-off the spouse that is not remaining in the home.
The REFINANCE loan pays-off the existing Mortgage/Note, and absolves both parties/spouses of the Mortgage Payment originally initiated as a couple. Only the person staying in the home … the one seeking the Refinance loan … will be obligated on the property moving forward.
The EXITING spouse “Quitclaim Deeds” their former interest in the property upon completion of the remaining partner’s Refinance. The exiting spouse is “absolved” of their debt on the property once the original Mortgage is paid-off.
I see way too many divorcing spouses leave the marital home, not getting their Equity share. And more importantly, not getting their ex-spouse to buy them out and retire the loan/debt made together as a couple on the property.
It’s important to understand: When this important step is not taken care … when a payoff and subsequent Release of Mortgage is not issued and recorded … that the entire Mortgage Payment on the loan made as a couple (including all Real Estate Taxes, Insurance, and Homeowners Association Fees, if included) has to be counted as debt if/when the EXITING spouse applies for a Mortgage on a new home purchase. (Only a specific divorce decree clause and proof of payments made by the other party can then/sometimes absolve that person from that Mortgage Debt). This often causes huge issues … or at minimum, delays in the new buying transaction.
Another scenario I often see is:
- Neither party can afford the home on their own without the other’s income … but the Divorce Agreement calls for the marital home to be Refinanced or Sold.
Recent losses in Home Values have made this an all too common occurrence. The sad reality is that the amount of the Mortgage(s) outstanding on the property is/are often higher than the Current Market Value. A Short Sale or Foreclosure must then be considered.
It’s also important to point out: All situations involving Real Estate and a Divorce are unique to that couple. IF both parties can agree to trust:
- Their attorney(s)
- A knowledgeable, experienced Mortgage Lender well-versed in these scenarios
- Local, experienced real estate professionals
… positive results and outcomes can be found much more quickly and smoothly. Simple, straight-forward consultation and advice is key.
Important questions must be raised and answered by every divorcing couple owning real estate property:
- Is it possible to sell the marital home?
- At what price can the marital home be sold?
- Is there Equity in the home?
- Does that Equity allow for a Refinance?
- Does that Equity allow the EXITING spouse the funds they need to proceed with their plans/life?
Again, all the questions above need to be addressed and answered fully in order for each partner to discover their best options for moving forward. My best advice?
Seek and find the most knowledgeable and experienced professionals possible to help you navigate this challenging process.