Divorce Dilemmas: Who Gets The House?
People crave familiarity and certainty when life seems out of control during the divorce process. It’s natural to have an emotional reaction and want to keep the marital home, especially if children are involved. Maintaining daily routines, familiar surroundings, and consistent school districts and neighborhoods can all be sources of comfort when life is extremely uncomfortable. As a financial advisor, I encourage you to pause and consider these factors when deciding whether you want to be awarded the marital home in your divorce settlement.
First and most important, what are the opportunity costs of keeping the home? By that, I mean what assets are you giving up to purchase your spouse’s ownership interest, and what impact will that have on your long-term security? Unless you live in a rapidly appreciating market or you rent a portion of your home to another party, this is an asset that is going to cost money, not make money. You’ll need to refinance to remove your former spouse from the mortgage. This means you will need to qualify for a new mortgage, subject to the terms, and be able to afford the real estate taxes, insurance, and maintenance.
Tami Wollensak, a certified divorce lending professional, advises, “Ask a lender if your income streams qualify as acceptable income because there are specific timelines related to child support and maintenance, rejoining the workforce, part-time income, and self-employed income. All need to be analyzed to see if they are qualified sources.” Also consider whether you will have to outsource work your spouse used to handle, e.g., lawn care, handyman jobs, etc. Financial projections, as part of your new solo financial plan, can help determine how much you can afford to spend on housing.
Second, there is risk associated with keeping the marital home. Let’s assume you want to finish raising your children there and then downsize to a smaller home/condo. Regular maintenance is going to be critical, along with unknown capital improvements, e.g., furnace, air conditioner, alarm system, pool, irrigation, etc. “If you intend to keep your home, have it inspected to identify and understand all the deferred maintenance. The inspection report can be useful in negotiations,” Wollensak adds.
Your eventual sale will be subject to market conditions at the time. The home is going to need to be maintained, improved and, ideally, sold when market conditions are optimal. These are good but lofty goals, all involving uncertainty and risk.
If staying in the same school district is important, there may be other options in the neighborhood. Consider purchasing or leasing a smaller home. Think of this as a fresh start with an opportunity to make new memories. The years pass quickly when children are in school and sports activities. Before you know it, you may be an empty nester living in a large family home that no longer meets your needs. You can make any house a home. A smaller home accompanied by an investment portfolio may provide the best long-term security.
If you decide to sell the marital home to a third party, you may want to list it prior to the start of divorce proceedings. Listing as soon as you know divorce is inevitable will provide more time on the market and help you avoid looking like desperate sellers. When selling to a third party, it’s likely both spouses will be motivated to work together to achieve the best return. In cases where homes have appreciated significantly, timing of the sale should be considered carefully. If you are a couple (meaning you are still married on the last day of the calendar year) and you meet specific use and ownership criteria, you can exclude up to $500,000 of realized gain from taxation. As an individual, this exclusion is reduced to $250,000. Interim financing will be necessary if you intend to purchase a new home while selling the marital home before the divorce is final. Certain lenders specialize in meeting short-term financing needs of this nature.
The decision to keep or sell the marital home in a divorce proceeding merits careful consideration. It’s important to know if you can afford to retain 100% ownership interest in the home. Meeting with a mortgage professional to review options BEFORE you sign a settlement to accept the marital home is a smart step. It’s best to review your new solo financial projections to help you evaluate housing options. The goal is to help you make decisions in the short term which impact your long-term financial security with confidence and clarity.