One of the most significant financial and emotional decisions during a divorce is deciding the fate of the marital home. Determining what happens to the home isn't always straightforward and involves careful consideration of finances, emotions, and, often, the children involved.
Options for the Marital Home During Divorce
When mediating the disposition of the marital home, the objective is to close the negotiation gap and reach a mutually beneficial solution. This can be challenging, given the intertwined emotions and financial implications.
From a financial perspective, there are generally two primary options:
- Sell the Marital Home and Split the Proceeds
- One Spouse Retains the Property and Compensates the Other Spouse for Their Equity Share
Methods of Equity Compensation
The second option can be achieved in two common ways:
- Refinancing the Current Mortgage: The spouse retaining the home refinances the mortgage and pays the vacating spouse their equity share from the new mortgage proceeds.
- Trading Marital Assets: The spouse retaining the home compensates the vacating spouse by giving up rights to other marital assets.
Importance of Mortgage Qualification
Reaching an agreement on dividing the marital home is a crucial step. Equally important is ensuring the spouse who retains the home can qualify for new mortgage financing once the divorce is final. Overlooking this step can lead to future frustration, potential litigation, and the failure to execute settlement orders.
Role of a Certified Divorce Lending Professional (CDLP®)
Incorporating divorce mortgage planning with the assistance of a Certified Divorce Lending Professional (CDLP®) can help identify possible solutions. A CDLP® can assist both parties in moving past counterproductive positions and emotions while exploring possibilities, resources, and solutions.
Equity Buyout Preapproval
An Equity Buyout Preapproval should be required by the spouse retaining the marital home if new mortgage financing is needed. This preapproval ensures the vacating spouse is removed from the current mortgage, or the in-spouse can buy out the out-spouse's equity in cash.
Benefits of Equity Buyout Preapproval:
- Accounts for All Financial Requirements: A CDLP® can evaluate income, joint and individual debt, and assets needed for mortgage financing.
- Eliminates Fear of Selling: Ensures the in-spouse can obtain mortgage financing as required by the divorce settlement.
- Prevents Litigation: Reduces the risk of returning to court due to unmet settlement requirements.
- Provides Confidence: Assures all parties that mortgage financing will be available post-divorce, alleviating concerns about execution.
Prequalification vs. Preapproval
- Prequalification: A basic estimate of how much mortgage the borrower can afford based on initial financial information.
- Preapproval: A more accurate determination based on verified financial information, providing a stronger indication of the borrower's lending strength.
Achieving a Successful Divorce Settlement
A successful divorce settlement involves assembling the pieces in a way that both spouses emerge whole. Each member of the divorce team, including the CDLP®, should contribute value and perspective to ensure a favorable outcome.
Get Organized with the Divorcing Your Mortgage Homeowner Workbook
Contact a CDLP® today to receive a copy of the Divorcing Your Mortgage Homeowner Workbook. This guide covers credit, real estate, and mortgage financing after divorce, helping you get organized, prepared, and informed about your mortgage financing options, whether refinancing the marital home in an Equity Buyout or preparing to sell and purchase a new home post-divorce.
Conclusion
A Certified Divorce Lending Professional (CDLP®) helps divorcing homeowners make informed decisions about home equity solutions, identifying potential conflicts between the divorce settlement and mortgage financing. Incorporating Divorce Mortgage Planning ensures a holistic evaluation of mortgage options, aligning them with long and short-term financial goals, minimizing taxes, and maximizing cash flow.
Involving a CDLP® early in the divorce settlement process sets the stage for successful mortgage financing in the future.
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
