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Divorce and the Marital Home – A Source of Problems, A Source of Solutions

 

By Scott Henbest

 

As someone whose job it is to help people find mortgages, it should not surprise you that a lot of the people I help are people affected by divorce.  It is not uncommon for the marital home to be the largest, or one of the largest, financial assets in the marriage.  Because of this, dividing the interests of the husband and the wife can dramatically affect how the other marital assets will be divided.  Making decisions without a clear understanding of the financial implications, both short- and long-term, the manner in which the marital home is settled can be a formula for disaster.  On the positive side, the marital home can be the best source for finding a workable financial solution to your divorce.   

Settling the marital home is obviously not the place to cut corners.  The best advice is to hire a professional who is familiar with the financial aspects of divorce, better yet someone who is well connected with professionals who specialize in and understand this aspect of the divorce process.  This professional is often the mortgage broker, because mortgage brokers deal with attorneys, financial experts and multiple lenders on a regular basis and can “shop around” for and help put together creative financial solutions to your divorce.     

Aside from its effect on the division of other assets, these are some of the issues that come into play in a divorce.  The home is an example of what is called an “illiquid” asset.  It is not the type of asset from which you can easily and inexpensively withdraw cash.  Second, the marital home is often jointly owned and jointly indebted.  Third, there are often important non-financial issues involved with the division of the home, such as the presence of young children, emotional ties to the home and emotional security.   

When a couple buys a home, the husband and wife are usually included on the mortgage and the deed, and the income and credit for both are used to qualify for the mortgage.  If the ownership in the home will change as a result of the divorce, or a new home or homes will be purchased, a new mortgage, based on the income and credit of only one of the spouses will frequently be needed.  Should the house be sold?  Should the sale be deferred to a later date, such as after the children will graduate from school?  Should one spouse buyout the other?  Should a new home or homes be purchased?  If so, for how much? 

Because your financial and emotional futures hang in the balance, these are some of the questions you will need to ask before you make any decisions:  Is this something I can afford?  What lifestyle adjustments or sacrifices would I have to make to make it workable?  What affect would this have on any of my perceived benefits?  Given these lifestyle adjustments, is this something I would still want to do?  What are the potential risks to me, and what can I do to minimize them?   

The bank will also be a party to your new mortgage, and getting a mortgage or an affordable mortgage rate will ultimately will be a function of its assessment of its risk as well.  Banks generally use housing ratios and debt ratios to qualify people for mortgages.  Ratios that banks generally feel comfortable with are 28% of gross monthly income (including alimony or child support, if sustained for a certain period of time) for housing and 36% for total debt, including the mortgage payment.  The more equity (ownership interest) you have in the home, the easier it will be to find financing.  Credit scores can come into play as well.  The better your credit, the more options will be available to you, sometimes regardless of your income.  A good mortgage broker may be able to find a lender who will deviate somewhat from these ratios, or may be able to come up with creative financing options, but you should never take on more debt than you can afford to pay.



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