Divorce can be intricate, tricky, and emotionally overwhelming. When you have to relocate, find new housing and decide to rent or purchase a new home, you pile on additional tasks and frustration. And when you consider buying a new home with cash after divorce, many people don't realize the risks involved in doing so.
Many divorcing spouses understand the financial benefits of owning a home rather than renting. While obtaining mortgage financing on any given day may oftentimes involve a lot of paperwork and challenges, doing so during a divorce may seem overwhelming and out of reach for many.
Risks Involved in Buying a New Home With Cash After Divorce
For many reasons, divorcing clients may decide buying a new home with cash rather than obtaining mortgage financing is the right move. New home buyers who are in a position to pay cash for their new home need to make sure it is not only the right decision financially but that you protect your ability to use the mortgage interest deduction on future mortgages.
Two Categories of Mortgage Interest Deduction
The mortgage interest deduction is divided into two categories: Acquisition and Home Equity Indebtedness. Acquisition Indebtedness is any mortgage obtained to either purchase (acquire) or significantly improve the home. Home Equity Indebtedness is any mortgage obtained for any other reason than acquisition indebtedness.
What Was the Reason for Using Cash?
When a new homeowner buys their home with cash, they need to ask themselves what their intent was for paying cash. Was it to avoid having any type of mortgage financing? Was it because they currently were unable to obtain mortgage financing because of an ongoing divorce or they didn’t qualify because they were unable to meet the requirements to use maintenance or child support as qualified income? Maybe their debt to income was too high because of their obligation to pay spousal support? Or maybe it was simply to have their purchase offer more attractive to the seller in a hot seller's market.
Whatever the reason, it may be in their best interest to speak to their financial adviser first in order to avoid losing any future mortgage interest deductions for tax purposes. If their intent is to take out a future mortgage to replenish their cash reserves used to purchase the home, they need to know there is a time limit to do so. Otherwise, they may risk losing any future mortgage interest deductions on the new loan.
IRS Tax Guidelines
Currently, IRS Tax Guidelines have a 90-day window for new homeowners to apply for a new mortgage when buying a home with cash in order for this new mortgage to be classified as Acquisition Indebtedness. If a new mortgage is not applied for during this initial 90-day window, any new mortgage will be categorized as Home Equity Indebtedness which has a mortgage limit of $100,000 and is currently non-tax-deductible through the year 2025.
Getting By With a Little Help From Your ... CDLP
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement agreement can help the divorcing homeowners set the stage for successful mortgage financing in the future.
Divorce Mortgage Planning is the process of evaluating your mortgage options in the context of your overall financial objectives as they pertain to your divorcing situation. Working directly with your divorce team, a CDLP™ understands the intersection of divorce, tax, real estate, and mortgage financing. The role of the CDLP™ is to help you integrate the mortgage you select into your overall long and short financial and investment goals, to help you minimize your taxes, and to minimize your interest expense and maximize your cash flow.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
Copyright 2021—All Rights Divorce Lending Association.