“Housing prices have skyrocketed since we bought our home five years ago….and interest rates more than doubled. We know we need to divorce. But, where will we live?” After couples make the difficult decision to divorce, their next biggest challenge is navigating options for finding housing after divorce. What can couples do?
When couples divorce, prime issues include:
- Who gets the house?
- Can that person keep the current mortgage? Do they have to refinance to do so?
- Where will the other find housing?
- If there are children and no one can keep the house, can both parents find and afford housing in the school district?
How do couples find answers to all this in the current housing market?
The Housing Challenge
Higher interest rates—The 2008 housing crisis forced the federal government to “pay” people to buy houses by offering record-low interest rates. The problem? Long after people were buying houses again—rates stayed low. This lulled a new generation into believing you only pay 3 – 4% on a mortgage. Though we are nowhere near the historic average mortgage rates (10%)—people are appalled by the thought of a 6-7% mortgage interest rate. Some of the biggest fights in divorce involve how to keep the lower rate.
Skyrocketing house prices—Housing prices increased 42% from summer of 2020 to summer of 2023. The double whammy of a higher interest rate on a much higher mortgage has made purchasing a house incredibly difficult. Especially when the two incomes that used to buy one house are now split between two. How do both afford a place to live?
Skyrocketing rent—Many understand they won’t be able to buy a house. The shock comes when they find they don’t qualify to rent either. As major corporations buy up single-family houses for rentals and significantly raise rent, many can’t afford to even rent a place to live.
More, stay-at-home parents often must have at least a year of income to qualify to rent. Where do they go in the meantime?
These factors all combine to say one thing. As couples consider divorce, they need to plan ahead for the coming housing challenge.
Options for Finding Housing Despite the Challenge
Using “Anna” and “Joe” as examples, what are the various options? Assume Anna and Joe agree they want Anna to keep the house.
Traditional—sell the house/split the net equity. Courts and attorneys vastly prefer this. Selling the home provides a clean split of profits and financially separates the spouses. It is easy to enforce and avoids issues down the road.
Each person takes their portion of the net proceeds to use toward finding housing on their own. When the house comprises one of if not THE prime asset, this bulk of proceeds may be the best source to fund a new living arrangement.
The downside—increasingly people cannot afford to buy a home in the area where they now own their home. This option means moving to another area—hard for people who have built their lives (commute to work, neighborhood relationships, and hangouts) around their home. Even harder when this means children must change schools.
One person owns—that person remains. The easiest (and most rare) scenario is for the house and mortgage to be in one spouse’s name. Say Anna brought her home to the marriage. She and Joe divorce. The house would still be considered marital property, with Joe likely due some portion (depending on the agreement) of the value of the house. They agree Anna will keep the house and either take out a Home Equity Line of Credit (HELOC) or a second mortgage to pay Joe his portion of the net equity value of the house. Or, they can agree Joe’s interest in the home is offset by another asset.
If both are on the title, but only Anna on the mortgage—then Joe would provide a Quitclaim Deed deeding Anna his portion of the home.
If both are on house and mortgage:
Assumable mortgages. If both are on the mortgage, things get much more complicated. First, check to see if the mortgage is assumable. Many FHA and VA mortgages are—a boon to couples. With an assumable mortgage, Anna must simply qualify to make the current mortgage payment on her sole income. If she does, she pays the assumption fee and is able to keep the mortgage at the same mortgage rate. Unfortunately, most conventional mortgages are not assumable, but check. Every so often one still is.
The challenge is how to pay Joe his interest in the mortgage. If couples can agree on this, the assumable mortgage makes keeping the house easier.
One refinances and buys out the other. This is the court’s preferred option. To keep the house, Anna must refinance the home in her sole name. To do so she must qualify on her sole income for the higher interest rate on both the current mortgage and any amount added to the mortgage to pay Joe his portion of the house. This cleanly separates parties. However, many spouses don’t qualify. The couple loses the house—and suffers everything that goes with that.
One spouse keeps the house and both remain on the mortgage. When the mortgage isn’t assumable, how can one keep the house? Many couples, especially those with children, opt for one of them to keep the marital home so children can remain in their school district. Anna would stay in the home while Joe agrees to stay on the mortgage for a defined period of time. Anna would either pay Joe his portion of the value of the home now (through other funds or payments over time) or Joe would agree to wait to receive his portion until the deadline for Anna refinancing in her own name or selling the house comes. This allows Anna to keep the house at the current house payment and the couple to keep their children in their school. A potential huge win for the family. BUT, judges and attorneys despise this option. Often for valid reasons.
Drawbacks of Keeping Both on the Mortgage
Defining responsibility. If both stay on the mortgage:
- What happens if Anna fails to make the mortgage payment? Joe is still responsible to the mortgage company for the payment. The company will likely seek payment from him. More, Joe’s credit rating will be impacted by late or missed payments. And, finally the mortgage will count in Joe’s debt-to-loan ratio—potentially preventing him from qualifying for his own mortgage, car loan, or other needed loan. Assessing the impact of staying on the loan for Joe is key.
More, clear provisions for penalties for noncompliance by Anna should be part of any agreement for Joe to stay on the mortgage—i.e. court immediately orders the house be sold upon 2 or more untimely payments. Or, Joe may move back into the house, and Anna must find a new living situation. The agreement should clearly spell out how Anna will make Joe whole financially.
- Who is responsible for utilities? Maintenance costs? These should be clearly spelled out in the agreement along with provisions for failure to make payments or to maintain the residence.
- How does Joe afford housing if he is waiting for his portion of the house? Should interest be added to the amount he is receiving to pay him for waiting to receive his portion? This also needs to be considered and agreements clearly defined.
What if Anna dies before she refinances? What if Joe and Anna agreed that Anna was keeping all the equity in the house as part of her portion of the marital estate, then she dies before refinancing? Can Joe (who is still on the mortgage) move back into the marital home to keep the house at the same interest rate? How does Anna’s portion of equity get to her heirs? These potentials should be considered and spelled out in any agreement.
What if Joe dies before Anna refinances? The reason one judge won’t allow divorcing spouses to stay on the same mortgage is a situation that arose in her court. “Anna” kept the house and “Joe” stayed on mortgage. Joe remarried, then died. His portion of the house went to his new wife. Former wife and new wife co-owned the house. Conflict exploded.
All these areas detail how continuing to co-own and co-owe on the marital residence can meet key priorities now—but can also create huge areas of conflict as each person moves into their separate life. This is the reason judges prefer a clean split.
This is how mediation can more effectively address the unique desires and priorities of families than the cookie cutter of litigation. If spouses truly want to find a way to manage housing, they can work with their mediator to ensure provisions are in place to protect both against the possible complications that may arise. Instead of pushing couples into a cookie-cutter solution, mediators work with couples to tailor solutions to their needs.
If you would like more information on navigating all the decisions divorce requires, contact Resolution Mediation for our Couples Mediation by clicking HERE or calling 317-793-0825. We look forward to serving you.
As always, the above is for information only. Seek a professional for guidance in your personal situation. This is an advertisement.
