Divorce and Your Home: How to Split your Most Important Asset

The declining real estate market has added another headache to couples who are divorcing… “What should we do with our home?”

by Allison Gervais
Sr. Mortgage Loan Consultant

Many couples are forced to come up with creative ways to deal with this dilemma.  With the popularity of do- it-yourself mediation and collaborative divorce, couples are able to find solutions that are helpful while the economy is less than favorable. 

Divorce and Creative Solutions to Settling the Home Dilemma

I’ve spoken with many clients who own a home together, married or not, and have decided to end their relationship.  In the past many couples simply opted to sell their house and split the remaining proceeds from the sale. 

But with the decline in the housing market this is currently not the most favorable option.  Adding to the complexity, quite often one partner wants to keep the house, especially if there are children involved. 

Couples are negotiating more creatively with the help of professionals to find solutions to this issue when a full cash buyout is not an option or not the best solution.  (For example a person may not want to cash out a retirement account that has hefty fines and tax penalties to buyout an ex.) 

What Steps Need to be Taken to Protect the Divorcing Parties

It’s in the best interest of the person moving out to remove their responsibility to the mortgage.  If their ex makes even one late payment, it will ruin his/her credit.  The obligation could also prohibit future loans.  

Taking one’s name off the mortgage is historically done through a refinance since the banks don’t usually allow one person to simply remove their name from the mortgage obligation.  Fortunately the rates are still extremely low so it makes qualifying a little easier.  Adjustable rate loans are a great option when qualifying is an issue. 

What if there is not enough equity to completely buyout the other person?

This is where couples can get creative.

Example: Kate and Mark are getting divorced.  Mark is moving out of the family house and Kate owes Mark $50,000 for his share of the equity.  Kate is only able to obtain a rate and term loan, meaning she cannot receive any cash out to pay Mark off. 

What are her options?  She has money in retirement but does not want to cash it out and pay penalties.  

1. One answer is for Mark to be taken off the loan through the refinance, but remain on the title to the property. 

This takes away the mortgage responsibility but keeps his interest in the property.  They can decide to sell at a later date, when the real estate market increases, and Mark will receive more equity at a later date. 

2. Another popular option is for Mark to secure a note on the property and Kate pays him monthly payments at a certain interest rate. 

Kate would want to consider what the market rate is and if it is feasible to make an additional payment each month.  Mark would want to consider the consequences of tying up his equity in exchange for earning interest on his money.  The interest rate is negotiable between the couple; however, most consider the current market rate and the length of time the loan is paid back. 

Be Open to Compromise

There is not a perfect standard solution as each situation differs and tax consequences vary.   Both parties need to be open to compromise. 

If couples are able to think clearly, logically and have good communication, they will save money in the long run and have a less stressful separation.  Creating short term and long term solutions and goals helps keep both parties protected. 

Contacting your mortgage broker is the first step to find out if refinancing is an option.

Allison Gervais  is a Senior Mortgage Loan Consultant with First Capital Group – a mortgage company in San Francisco, CA. She offers residential and commercial financing. Allison is also a Certified Divorce Financial Analyst and uses her expertise to assist clients with the equitable division of assets. Please e-mail Allison for more information.

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Posted on 24. May, 2010 by SFWJ in Real Estate

Tags: family, highlight, Home, Money, wealth