Divorcing Your Spouse…and Your House?

When you married your spouse, you thought it would last forever. As fate would have it, your mortgage has endured longer than your marriage. Between health care, retirement, alimony, child support, and division of assets, determining what is to become of the home can be extremely difficult. Here are some tips on navigating the real estate side of a divorce.

Credit Score:

If you have a credit score, you are going to want to protect it. A credit score above 640 can be a big help when buying your next home or refinancing (post-divorce). The best way to prevent changes to your rating is by closing all joint accounts (banks and credit cards). If you can’t close the joint accounts, freezing the accounts can prevent an adverse change in your credit score. If your spouse had a stellar rating and yours is non-existent, it would be prudent to open up lines of credit in your name. This way, if you need to buy or refinance a home, you have the means to do so.

Taxes and Home Ownership Options:

Generally speaking, there are three possible primary outcomes regarding “custody” of the house.

Option number one is where both parties agree to sell the home, split the proceeds and pay taxes on the profit.

Option number two is where one party remains in the home and the other leaves. This option can have tax consequences specific to your situation so be sure to consult with a tax professional before making a final decision.

Option number three is where the home is underwater, and the sellers can’t afford to pay the difference. In this instance, the seller’s will either need to rent the house until they have accrued enough equity to sell, or they will need to negotiate a short sale or a deed in lieu. A deed in lieu is where both parties agree to give the home back to the bank voluntarily. If negotiated properly, a deed in lieu can have little to no impact on your credit score. A short sale occurs when the bank is willing to sell the home for less than is owed.  Be aware that if your bank is prepared to perform a short sale or a deed in lieu, you could be taxed on the difference between the outstanding loan balance and the purchase price. If the bank is unwilling to conduct a deed in lieu or a short sale, the home could go into foreclosure. Both a short sale and a foreclosure will have negative impacts on your credit score.

Joint Mortgage:

You may find the next piece of information shocking. If one party would like to stay in the marital home, it is imperative to refinance the mortgage. If this does not take place, BOTH parties are still liable for the mortgage. It doesn’t matter if you have a divorce decree. It doesn’t matter if you haven’t lived in the home for years. It doesn’t even matter if you have a quit claim deed removing you from the title. If you have an existing joint mortgage, you are still liable for the mortgage. Because you have not re-negotiated your loan with the bank, the original loan remains in effect. Make sure to refinance the home before completing divorce proceedings. If you don’t, you run the risk of your credit being damaged if your former spouse stops payments on the loan. You may also have a difficult time getting a new home loan because the old home loan will affect your debt to income ratio.

Recap:

Most divorces are messy. Some are amicably resolved. But almost all are complicated. Make sure you take the required steps protect your credit. Understand the real estate tax consequences and if appropriate, refinance the home before the divorce is final. Taking the necessary precautions ensures a complete divorce from both your spouse and your home.

John Jennings, III is a licensed Realtor® who works for Mid State Realty in Coalinga, CA. For more articles like this one go to johnjenningsrealtor.com. John can be reached at john@oaktreere.net and (559) 970-4312.