“Will I be homeless when this is done?” Jen tearfully whispered the question that hounded her since Seth announced he wanted a divorce.
All too often, clients enter the divorce process assuming the most dire outcomes. Previously, it was easy to assure them that—though life would be different—they would be ok.
Today—between COVID, rising health costs, and sky-rocketing inflation—that assurance is less certain. And, no area challenges couples in divorce quite like housing. Often the marital home is a major—if not THE major—asset. For couples with children, it represents even more. Helping couples navigate this challenge proves critical to a successfully completing a divorce.
Challenge 1: We can sell our house. . . but can we buy?
In the past, home values were relatively stable. More, low interest rates opened the possibilities for home ownership to a broad spectrum of people.
Now, skyrocketing home prices creates the benefit of increased equity. Couples who purchased their homes even as little as three years ago have seen huge jumps in the value of their home. When selling, couples have more money to split, which helps with paying off debt and providing money to move forward separately.
Yet, when buying, each person often finds they can’t afford to relocate within their neighborhood. Higher values mean they can’t afford even the home they just sold. When individuals must move a distance to find something affordable, they feel they not only lost their marriage—they lost their friends, their community, and their support network.
Even worse—many can’t afford to purchase a house but must rent. While not homeless, they feel displaced.
The challenge grows for couples with children.
Challenge 2: Can we keep the house for the children?
Often parents want to keep the house to protect children’s ties to neighborhood, friends, and school. So, they agree that one will keep the house. This means buying out the other parent by refinancing the house in the first parent’s sole name and paying the other their share of the equity.
Yet, while one or both parents may be able to afford the current mortgage payment on their own, higher house values create significantly more value in equity. The amount to buy out the other parent combined with an increased interest rate on a far bigger mortgage often means neither can afford the new payment.
Nor can they afford to sell the current home and buy in the same neighborhood or school district. At the same time their house increased in value—so did the others. Despite sizeable equity, many parents can’t afford to keep children in their school.
Challenge 3: I have the money, but where is the house?
Even couples with ample finances struggle. Parents often find co-parenting goes more smoothly when parents live close to one another. Transportation between parenting time proves easier. Children who can ride their bike or walk between mom and dad’s home adjust more quickly and more healthily to their redefined family. Both parents find it easier to participate in school events, attend games, and go to extra-curricular activities. So, when one parent can afford to keep the marital house, the other often wants to buy a home close by.
Yet, as one parent stated, “When I FINALLY see a house come on the market, I stand in the driveway writing an offer only to find it already sold—for thousands more than asking price. How am I supposed to find something?”
Even with new construction, parents are looking at a minimum of a year before they can get into a home. Where are they to stay in the meantime? And, what does the uncertainty do to their children?
Ways to meet the challenge and beat the crisis
Traditional court rules for addressing housing issues merely exacerbate this crisis. Mediation offers couples the opportunity to explore creative ways to meet the challenge, without becoming homeless. Here are some tips:
Tip 1–Get Ready for Financing
A seasoned mortgage broker offers her insights for those seeking to refinance the marital home or buy a new home due to divorce:
- Start the mortgage process before filing—If couples know that one will buy out the other or that both need to purchase a different home quickly, completing the financial side of the settlement agreement before filing for divorce eases the process. Once the Petition for Dissolution is filed, the mortgage company generally can’t close a mortgage until the divorce is completed. Couples in Conciliation Mediation can meet with the mediator to create a financial plan and proceed with finding housing before filing for divorce, which allows for quicker, smoother transitions.
- Understand the 6-month rule for child support or maintenance (alimony)—If an individual plans to use child support or maintenance (Indiana’s version of alimony) to qualify for a mortgage, they must receive these payments for at least 6 months before the payments can be used to qualify for a loan. Knowing this timeline helps individuals understand timing and create a housing plan.
- PAY THE BILLS!—Divorcing couples often communicate poorly, which can prove disastrous in the mortgage process. Each person needs to know which bills they will pay and follow through. Any non-payment of a joint liability affects credit score which affects qualifying for the mortgage. The most important bill is the current mortgage. Once mortgage payments are delinquent, the mortgage company must wait 12 months post-delinquency to qualify an individual for a new mortgage—whether refinancing the current house or a new mortgage.
Get Creative on Housing
Traditionally couples either sell the house and split the proceeds or one spouse buys out the other. With rising housing costs and mortgage rates, often neither can afford to buy out the other—yet they need to keep the house for the children, for elderly parents, for a home-based business, or because it is the only home they can afford at present.
Co-owning the home—Many couples are agreeing to continue co-owning the marital home for the time being. This avoids the double burden of buying out suddenly higher equity at a significantly higher interest rate.
- Pros—This allows couples to keep a home they may need to keep either for financial reasons or for children. Established businesses reatin their locale. Parents keep children or elderly family in a familiar home, in their neighborhood, and in their school. Often, one parent stays in the home while the other finds a new place. Or, increasingly, parents actually rotate into the home for parenting time and live elsewhere during the other parent’s time. This eases the transition for the children and allows each parent to still enjoy the home.
- Cons—Both spouses stay on the loan, which affects the non-residential spouse being able to borrow for other purchases. More, the non-residential spouse risks being liable for non-payment of mortgage payments, if the spouse remaining in the home defaults. For rotating parents, the ability to establish an individual life can be compromised and still sharing living space with the other parent can be difficult. Very clear language in the Settlement Agreement needs to define this option to protect both.
Alternative payout—Instead of an immediate refinance of the current mortgage, one spouse can cay buy out the other over time. Couples agree to a money judgment for regular payments that are more affordable than the new mortgage payment a refinance would require. If one spouse doesn’t want to buy a home soon but needs income, this option meets that goal.
There can be a hybrid of some payment now through a smaller refinance and a money judgment to pay the rest, with a final balloon payment at a set time in the future. Couples can agree on perhaps a larger share of the equity going to the spouse who waits as a form of compensation.
Home equity loan—Taking out a home equity loan is another way to buy out a spouse now and keep payments affordable. While the interest rate on the loan to the other spouse may be a bit higher, the primary mortgage stays at the lower rate. More, some people are able to qualify for a home equity loan when they could not for a new mortgage.
For any of these options, the couple will need a carefully crafted agreement that sets the length of time they will co-own, provides financial protection for both, and outlines how the equity will eventually be split along with compensating the non-residential spouse for foregoing receiving funds for the time being.
Please note that this information is general and is not intended as advice. Consult a professional for specific recommendations for your situation.
The Resolution Center is known for helping couples find creative solutions far beyond the few available through the legal system. We help couples who are willing to work together successfully navigate all the challenges of divorce. If you would like more information, please email Info@TheResolutionCenterIndy.com or call 317-344-9740. We look forward to serving you.