Real Estate, Financing, and Divorce
Going through a divorce is a very difficult time. And when it comes to dividing marital property, Buying, selling, and financing the purchase of real estate can also be a very stressful and difficult time. And so it goes – the combination of these life-altering events can create a real “pressure-cooker” situation.
A common occurrence in a divorce is the division of assets, and most often the divorcing couple’s home is their largest joint asset. If the marital home cannot be divided, as is most often the case, the three questions that commonly arise are: “Do we sell the house and split the proceeds?” or “Does one of us buy the other out?” or “Will I be able to buy another home by myself?”
Let’s address the first question: “Do we sell the house and split the proceeds?” The answer may lie in responses to the following:
- Is selling a necessity at this time?
- Is now the best time to sell?
- What’s best for the children (school, daycare, friends)?
- Is it affordable to either or both parties?
- What do you estimate the house to be worth in today’s market?
If the decision is made to sell, then it is generally a good idea to seek out a caring, compassionate, and neutral real estate professional. Then, the divorcing parties must:
- Determine a reasonable time frame for preparing the house for sale, and
- Determine a reasonable time frame for the price and sale of the house, and
- Be prepared for the acceptance of an offer. That is, the divorcing parties must have pre-determined by mutual agreement a minimum price at which they would accept an offer.
Upon successful completion of the sale, at the time of settlement or the close of escrow, net profit from the sale is divided according to the divorce settlement agreement.
Now, let’s address the second question: “Does one of us buy the other out?” If it is agreed that one of the divorcing parties will “buy out” the other party, another course of action is necessary. Buying out the other party often means transferring title to the property to the “buying party” and then he or she refinances the existing loan. Refinancing accomplishes two necessary objectives: 1) to remove the other party from the loan and any future liability, and 2) to take cash out from the loan to pay the other party their share of the equity. This is never a problem when:
- The buying party has maintained a good credit rating during the divorce process, and
- The buying party meets the debt-to-income ratios required to qualify for the new loan, and
- There is sufficient equity in the property.
Upon transfer of title, and closing of the loan, the Title Company will disburse the cash representing the “bought-out” party’s share of equity.
Lastly, let’s address the third question: “Will I be able to buy another home by myself?” Just as in the case of buying out the other party, your ability to buy a new home will be dependent upon your credit rating, your debt-to-income ratios, and having sufficient cash for down payment and closing costs.
In both cases of “buying out” or “buying new” it is highly advisable to seek the counsel of a mortgage professional who can help you determine what your financing options are. Carefully choose a lender who works closely with attorneys and realtors, and is experienced in dealing with divorce situations. Finally choose a lender who is willing to offer counsel free-of-charge.
Best wishes to you in dealing with the difficult times you’re going through.