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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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