Deciding what to do with the house can be a major quandary for couples getting a divorce, particularly when they share a home loan. When there is equity in the home, each spouse typically wants to take a share as part of the settlement agreement. But if one person wants to remain in the home, rather than sell it and split any profit, then that spouse will likely have to qualify for a home loan on his or her own.
Spouses who choose to stay may have to refinance their loan in order to cash out enough equity to pay off an ex. But even a spouse who has the financial resources for a buyout without drawing on home equity will still probably have to get a loan in his or her name. “The person walking away wants their share of the equity, but also wants their name off the loan as soon as possible,” said Kathleen B. Connell, a family law lawyer and lecturer in Atlanta. The obligation can tie up that person’s credit, and “if there’s a default,” Ms. Connell added, “the lender is going to sue them both, regardless of what the divorce agreement says.” One of the first questions to be answered, then, is whether a spouse who wants to keep the house or apartment can qualify for a home loan independently. And if so, would that spouse be able to afford all the other expenses associated with living in that home?
“The really important thing for both parties is to flesh out all of their expenses — how much it really costs,” said Cynthia Thompson, the founder of Divorce Planning Solutions, a financial planning firm in White Plains, N.Y. Ideally, this preparation should happen early on in the divorce process — too often, Ms. Thompson said, people are “arguing, litigating, fighting, having no idea of the whole picture.” Ms. Thompson frequently advises her clients to find out how much loan they can qualify for while divorce negotiations are ongoing. This information can be key: If they discover, for example, that cashing out equity will raise the loan to an unaffordable level, they might instead seek to divide some other asset differently to compensate for the equity share. “The important point to be made is that working with a qualified mortgage professional during the settlement process can help identify many of the hurdles,” she said. Source: The New York Times
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