Negotiating a divorce settlement can be grueling. The attempt to equitably divide your assets can make an already acrimonious situation even worse. Of particular concern is the battle over what is generally a couple’s largest asset: the marital home. Is it even possible to keep the house? Probably not, but some lenders are working on financial products that might soon give divorcing couples more options.
As it stands, divvying up the family home is likely to take one of two forms: turning the home over to one spouse, or selling it. Sure, both exes could continue to live under the same roof, but that’s usually impractical.
When there is a joint desire to sell the house, each spouse is equally interested in unloading the property quickly and maximizing the value so that the proceeds of the sale can be applied to the divorce settlement. But what happens when one spouse wishes to retain the home? In that case, the individual who wants to keep the home is forced to buy out his/her partner, or take over a mortgage that often was based on the combined income of both spouses.
If the spouse who wishes to retain the home finds they can’t afford the payments, there’s little choice but to put the house up for sale. Isn’t there anything lenders can do to help?
What about a divorce mortgage?
Lenders in the U.K. are reportedly devising a “divorce mortgage,” which would enable one partner to stay in the marital home by borrowing enough to buy out their ex-spouse for a period of time. Unfortunately, this is not an option in America.
“The ‘divorce mortgage’ does not currently exist in the U.S.,” says certified divorce financial analyst Aviva Pinto, director of Bronfman E.L. Rothschild in New York City. “If one-half of a divorcing couple does not have enough funds to cover the mortgage with existing funds, their salary, or spousal support, then the home will have to be sold.”
The bridge loan option
Dallas divorce and family law attorney Jeff Anderson of Orsinger, Nelson, Downing & Anderson says the closest thing to the divorce mortgage in the United States is a bridge loan, which gives the buyer time to sell the marital home and finish the divorce. Once the divorce is over and the marital home is sold, the bridge loan is paid off or converted into a normal 15- or 30-year term mortgage.
“This option is not available to everyone,” says Anderson. “The buyer must qualify for the loan, just like any other home purchase.”
And, he notes, if the soon-to-be former spouse wants to keep the house they are in, then there is little benefit from a bridge loan. In those cases, he says, “The existing marital home is either awarded to them in the divorce with the existing loan or they refinance it after (or sometimes during) the divorce.”
Refi or take over the existing payments
Refinancing may be the best option for the spouse who wants to remain in the marital house, but timing is important. “Most courts do not let either spouse make major purchases during a divorce because the assets of the marriage should be kept inside the marital estate and available for division to the extent possible,” says Anderson. “If the parties agree and work that agreement into writing, then one of them can purchase a house through the mortgage process.”
Should one-half of the divorcing couple express interest in taking over the payments, there are hoops to jump through and bankers to impress. “Lenders require a court order showing the maintenance payments to ensure that a person can afford a mortgage,” says Pinto. “Most banks will require a proof of six months of maintenance income to offer new homes loans.”
Coming up with the funds necessary to assume the mortgage may require some creativity on the part of the spouse who wishes to remain, according to Carolyn Woodruff, principal of Woodruff Family Law in Greensboro, North Carolina.
- Alimony and child support can be counted as income for the purposes of mortgage lenders who are assessing the borrower’s ability to qualify.
- Assets received in the divorce, such as a 401K, may help the remaining spouse come up with money to pay on the principal. “There are special tax rules for getting money out of a 401K in a divorce without penalty for the non-participant spouse,” says Woodruff.
- Obtaining a co-signer, such as a parent or a sibling, may improve a borrower’s odds of being approved for a loan refinance.
- Government programs, such as Making Home Affordable (MHA), are available for those needing help affording a home.
Unfortunately, says Woodruff, if none of the above solutions help the spouse resolve the mortgage conundrum, then the house will likely have to be sold. But if you’re determined to keep the house and want to fully explore your options, a good divorce lawyer can help connect you with more information.