Deciding what to do with the family house in divorce can be one of the biggest challenges facing couples going through it. For many years, the home was a coveted asset that was fought for among feuding spouses. However, in more recent times the plunge in real estate values has caused some homeowners equity to be “upside down”, meaning more is owed than owned in the property leaving spouses struggling over how to deal with this difficult situation.
Making the decision on whether or not to keep the house by either spouse, whether in a negative equity situation or not, should be carefully examined. Decisions based on partial information can have dire financial consequences if all the aspects have not been explored and fully analyzed.
Look at your home in the big picture as part of the whole and try to detach the emotion from your decision making. Start by looking at the monthly costs involved and see if it makes sense financially to keep the house in divorce. Remember that you will need to add the total costs of the mortgage, taxes, insurance, homeowner’s dues and maintenance when doing your calculations.
Some ideas to consider so you don’t end up in the poor house after your divorce:
- Joint mortgages should be severed at the time of the divorce if at all possible. Otherwise, if the party responsible for paying the mortgage can’t, or won’t, make the payments on time BOTH spouses credit will suffer substantially. (See the pitfalls in my case study here). Be aware that your creditors are not bound by the terms of your divorce agreement. If your name is on the note, you are still responsible for paying it!
- All assets are not created equal and the home may not be the best asset to keep, especially if you don’t have much access to liquid assets. Your home is an illiquid asset that does not produce cash flow. You can’t buy groceries or put gas in your car with it even if you do have value in your property. Money will be needed for ongoing repairs and maintenance.
- Don’t forget to factor in potential rising mortgage payments if your note is adjustable and taxes and insurance will also surely continue to rise over time.
- If you will only be keeping the house for a few years (perhaps until a child graduates) consider structuring your divorce settlement so that when the house is sold in the future, both parties share the costs of selling the home including repairs, maintenance, commissions and closing costs. This way one party is not saddled with all those costs alone. Of course, you also may be sharing market gains as well.
- It is vitally important to look into any potential capital gains tax liability a spouse may be assuming if they take the home as part of the settlement. Uncle Sam’s bite can be substantial in some cases.
- If the house really is too much to handle now, then a better choice might be to sell and downsize into something more affordable, but beware of purchasing a new home before the divorce is final as any property purchased while still married could potentially be considered marital property – meaning that you may have to split any potential equity in your new home with your soon-to-be ex. In addition, qualifying for a new mortgage on another home could be hindered because you will have to qualify for that new mortgage with all of the debt from the current home.
- Start small if you need to begin again after divorce. Find something that works in your budget and your means. You can always rebuild from there, but you will be starting anew on solid footing instead of a crumbling foundation.
Seek a divorce financial planning professional, who can connect you with a knowledgeable realtor and a savvy mortgage specialist. The earlier on you do this, the fewer problems you are likely to face. By working together, they can assess your situation and help you avoid the multitude of problems and pitfalls surrounding your family house in divorce.
Lisa C. Decker, CDFA