5 Mistakes to Avoid if You Want to
Keep the Family Home in Your Divorce
Carlie Berke Headapohl, CDFA®
July 5, 2017
1. Not Talking to Lenders Early in Your Divorce
You need to figure out if you can qualify for a mortgage post-divorce. Lenders will help you understand what you will need to qualify for your mortgage and you can incorporate this feedback into your divorce settlement negotiations.
Be sure to keep cancelled checks and bank statements showing the deposit of the support payments. You will need at least 6 months of documented temporary support.
2. Not Getting Temporary Support Established Early
If income from support will be needed for you to qualify to refinance the mortgage, make sure to get temporary support orders in place as soon as possible to start the clock on showing monthly, documented temporary support. Be sure to keep cancelled checks and bank statements showing the deposit of the support payments. You will need at least 6 months of documented temporary support. For conventional Fannie Mae and Freddie Mac mortgages, they typically want to see 12 months, but will look at less based on strength of borrower.
“The buyout is based on the value of the home at the time of the divorce.”
3. Not Properly Calculating the Value of the Equity
The buyout is based on the value of the home at the time of the divorce. This should be by a reputable appraisal professional with experience with divorce valuations. You also should get the home inspected to identify any major deferred maintenance. Finally, you should obtain an estimate of sales commissions and closing costs from a local real estate or escrow professional. The value of the equity should be based on the appraised value less major deferred maintenance, as opposed to normal wear and tear, and less commissions and closing costs.
In order to keep the home in a divorce, you need to be able to buyout your spouse’s share of the equity.
4. No Source of Funds to Buy Out Other Spouse’s Equity
In order to keep the home in a divorce, you need to be able to buyout your spouse’s share of the equity. For many, the home is the largest asset they have, so if most of your money is tied up in the equity of the home, then you may not be able to buyout your spouse. Some swap retirement assets or most of their savings for the home equity, but those options have implications that should be carefully considered.
“If you use liquid assets to buyout your spouse’s equity, you may find yourself short on cash for living expenses if you did not carefully review your post-divorce budget.”
5. Not Taking into Consideration Taxes and Liquidity
If your home has a large capital gain that exceeds $250,000, then you will be subject to potentially higher capital gains taxes when you ultimately sell the home. Prior to your divorce becoming final, if you sell the home, you can jointly deduct up to $500,000 of capital gains verses $250,000 if you are unmarried. If you use liquid assets to buyout your spouse’s equity, you may find yourself short on cash for living expenses if you did not carefully review your post-divorce budget.
A Certified Divorce Financial Analyst (CDFA®) can assist you in understanding how to evaluate the financial impact of keeping your home as well has help you determine the short and long-term impact of your proposed divorce settlement.
Contact us for a complimentary consultation.
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