Divorce can be intricate, tricky, and emotionally overwhelming. When you have to relocate, find new housing, and decide whether to rent or purchase a new home, the tasks can become even more frustrating. One of the biggest decisions is determining whether or not to buy a new home with cash during a divorce. Keep reading to find out!
Buying a New Home with Cash or Obtaining Mortgage Financing?
Many divorcing spouses understand the financial benefits of owning a home rather than renting. While obtaining mortgage financing involves paperwork and challenges, doing so during a divorce can seem overwhelming and out of reach for many.
For various reasons, divorcing clients may decide to purchase a new home with cash instead of obtaining mortgage financing. New home buyers in a position to pay cash must ensure it is the right financial decision, as it may affect their ability to deduct mortgage interest on future loans.
Understanding Mortgage Interest Deductions
The mortgage interest deduction is divided into two categories: Acquisition and Home Equity Indebtedness. Acquisition Indebtedness applies to any mortgage obtained to purchase or significantly improve the home. Home Equity Indebtedness applies to any mortgage obtained for other reasons.
When buying a home with cash, new homeowners should consider their intent. Was it to avoid mortgage financing altogether? Was it due to an inability to obtain financing because of an ongoing divorce, or not qualifying to use maintenance or child support as income? Perhaps their debt-to-income ratio was too high due to spousal support obligations.
Can You Replenish Cash Reserves by Taking Out a Mortgage?
If a new homeowner pays cash for their home, they need to consider the intent behind not obtaining mortgage financing. If the goal is to take out a mortgage later to replenish cash reserves, they must be aware of a time limit. Otherwise, they risk losing future mortgage interest deductions.
According to IRS Tax Guidelines, there is a 90-day window for new homeowners to apply for a mortgage on a home purchased with cash for it to be classified as Acquisition Indebtedness. If a mortgage is not applied for within this 90-day window, any new mortgage will be classified as Home Equity Indebtedness, which has a limit of $100,000 and is non-tax-deductible through 2025.
Ask Yourself, "What is the Intent of Buying a New Home with Cash?"
New homeowners who buy a home with cash should ask themselves, "What was the intent for paying cash?" If the intent is to obtain future mortgage financing to replenish cash reserves, they should consult with a mortgage professional and financial advisor first to avoid disqualifying their future mortgage interest deduction.
Work with a Certified Divorce Lending Professional (CDLP®)
Always work with a Certified Divorce Lending Professional (CDLP®) when dealing with divorce and real estate or mortgage financing. Their expertise can help navigate the complexities of buying a new home with cash during a divorce.
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.
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