One of the most impactful decisions you will make in divorce is what to do about the marital home. The family home or holiday retreat may mean a lot to both spouses, and the decision about what to do next could involve balancing financial, practical, and emotional considerations. In addition to the marital home, spouses may also own a beloved vacation home, or second home that may have been in the family for generations.
Historically high interest rates have further complicated the analysis parties are having to go through when considering what to do with real estate during a divorce. A home at a 3% interest is a lot more affordable than they are at current rates. Interest rates are currently high, but the federal authorities have indicated that they are likely to fall this year. In the Boston area, record home prices and high interest rates have led to a low supply of homes. Even if you are thinking of selling up, it may be difficult to find somewhere affordable to live. The climate of uncertainty and high interest rates means divorcing spouses have a balancing act on their hands.
As a result of this, there could be a number of options on the table, including buying out your spouse, jointly retaining an interest in the home until rates go down, or renting out properties you own, such as investment properties or a vacation home.
There are many rules to consider as part of this process, and each lender will have different specifications and requirements. It’s important to consult with your lender early on in the process to evaluate your options so you are better able to make the right decision when the time comes.
Decide on a Strategy
After deciding whether or not you want to keep a property you need to figure out how you are going to accomplish that goal. If there is a mortgage on the property you will need to either refinance or pay off the existing mortgage so that your spouse is no longer obligated on that debt.
The first thing you will want to do is reach out to a lender to see if you can qualify to assume the existing mortgage and what your payment would look like if you did.
You will also need to decide how you want to buy out your partners’ equity in the home. You will likely need an appraisal to determine the fair market value of the property is so you can figure out how much money you will need to buy out your spouse’s interest in the home.
Parties typically buy out a spouse’s interest in the home by pulling equity out of the home either through a refinance of the existing mortgage or obtaining a new mortgage. For others there may be assets that can be shifted to the other spouse to off-set their interest in the home. Some loans may also qualify for an assumption in which you can take on the mortgage on the original terms and at the original interest rate.
In the current climate divorcing spouses may choose to remain on a joint mortgage but allow one spouse to take responsibility for payments. If you choose this option, you must be sure that you or your spouse can afford the mortgage payments, as the other spouse will still be liable for the mortgage. These funding issues are why divorce negotiations surrounding real estate or the family home often circle around adjacent decisions about alimony and child support. Some spouses may choose to convert vacation properties or second homes into rental properties to make an income that can fund their lifestyle after divorce.
Be Aware of Important Timelines in Your Divorce
Mortgage assumption is an option in which you take on the mortgage with the original terms and interest rate. It is generally available for government-backed mortgages like FHA, USDA and VA, but not traditional loans. It is an attractive option if you want to transfer the mortgage but keep the original terms of your mortgage including your interest rate. However, lenders typically require the divorce decree before initiating the assumption process, so starting discussions with the lender early in the divorce process is advisable. In the context of divorce, a mortgage that appears to be non-assumable could be assumable, but you need to explore options with your lender or loan servicer early to avoid any surprises that could derail your divorce negotiations.
There are numerous factors to be aware of when it comes to the timing of property transfer in divorce. Your Separation Agreement should be carefully drafted with an experienced divorce attorney or mediator and should specify timelines and deadlines for signing any documents. The language in mortgage agreements differ and may contain clauses such as acceleration and due-on-sale clauses that require the lender’s consent before property is transferred, or else full payment of the remaining mortgage is required. The language of your mortgage agreement should be carefully assessed so that you know exactly when to notify your lender, financial institution, loan servicer and any other parties involved and when to deliver documents that will facilitate property transfer, such as the divorce decree and the filing and transfer of any deeds.
Timelines for property transfers should also involve planning around income and assets, which may involve child support, spousal support, earning potential, creditworthiness and other factors. Lenders may require 6 month history of child support or spousal support to qualify for a loan, and/or a guarantee of future payments, like spousal support, for a fixed period of time. Employment history and credit history could also determine how easily someone qualifies for a loan. Even if you are ready to jump back into the workforce or pay your debts, you may need to work or repay debts for a certain period of time to qualify for financing or a mortgage assumption. In addition, child support and spousal support often count as liabilities for the payor, which could impact the ability to get a loan. Your marital settlement agreement should carefully lay out the steps and obligations each spouse needs to take to provide any documentation and avoid any delays which could lead to conflict and financial loss to one or both spouses.
Don’t Forget About Equity
Even if you are able to assume your mortgage and keep the original interest rate, this doesn’t resolve the issue of home equity distribution. If the home’s value exceeds the mortgage, the spouse retaining the property may need to buy out the other by allocating additional cash, investments, or marital assets.
Be Aware of Tax Issues with Property Transfers In Divorce
It’s important to be aware of the tax impacts of property transfers involving the marital home and any vacation homes or second homes. Your decision making could impact your divorce balance sheet and leave you significantly better or worse off. Opting to keep a vacation home offers benefits such as recreation, rental income, and potential capital gains tax avoidance for heirs through the “stepped-up basis” rule upon inheritance. However, gifting a vacation home before a parent’s death may nullify this advantage, leading to substantial capital gains upon sale. There is an incentive to selling the primary residence in divorce, with the divorce potential capital gains tax exemptions up to $250,000 or $500,000. Converting a vacation home to a primary residence after a certain period can capitalize on the capital gains tax exemption. Keeping a second home or vacation home can provide rental income. It depends on the extent to which you can cooperate with your spouse. Each situation is different and all factors, including emotional attachment to any homes in the family, should be carefully considered.
Transitioning to a new life after divorce is a process that takes time and rewards careful planning. Often where there is income disparity between spouses, such as when one spouse has chosen to raise a family and the other spouse is the main earner, the transition to independence requires some forethought. An experienced Massachusetts divorce attorney mediator can work with you and your spouse in a collaborative divorce process or mediated divorce, or they can advocate for your interests as a litigator if the divorce becomes adversarial.
Psychologically, people’s sense of security is often attached to the ability to afford a comfortable home. Divorce negotiations should make it possible for both spouses to walk away with a sense of security and the ability to qualify for any funding needed to afford their new lifestyle after divorce. Please contact our highly experienced divorce attorneys to speak to us about your divorce transition and how to navigate any issues involving interest rates, mortgage loans and financing in your divorce.