If you are anticipating getting a divorce, first find out all the facts about your current mortgages and lines of credit - you might be surprised.
Too many times I see clients who do not know the facts of their mortgages and lines of credit. Gather this information on your house and mortgages as follows:
- Initial purchase price of the house and date of purchase
- Current mortgage amount, monthly payment separated by principal, interest, real estate taxes and HO insurance
- Equity line of credit against the house, including current balance, credit limit, current interest rate (fixed or variable), minimum monthly payment, and whether the loan is renewable annually
- Improvements on the house since purchase
- Tax cost basis on the house - estimate your long term capital gains tax exposure if you sell
Also, get a copy of your credit report. This will tell you your credit rating, if there are late payments, and list all outstanding credit cards and balances.
Now that you have all of this financial information, determine what it really costs to live in the house. Can either of you afford the house without the other’s shared income? If not, start looking around to determine what you could afford. Get at least two market analyses on your existing house. Meet with a mortgage broker to find out what kind of a loan you might qualify for. You will need an income stream for at least two years coming from a combination of the following: maintenance, child support, your earnings, and investment income. Will there be enough money for both of you to buy a house and qualify for a mortgage? What are the tax consequences if you stay in the house for two to three years after the divorce and then sell? (deferred maintenance, no sharing of the costs of sale, 100% of the income tax liability, etc.)
If you keep the house and mortgage there is no way to have your spouse’s name removed from the loan unless you refinance. Then you have the issue of qualifying for the loan on your own. As long as your spouse’s name is on the mortgage they are at risk if you default. Many spouses refuse to maintain this contingent liability. I have seen defaults occur ten years after the divorce. Believe me, the lender will pursue all parties that signed the note secured against the house at the time of purchase.
The current mortgage environment has become extremely volatile in the last six weeks. The overall credit market is very tight. Many homeowners are going into default and the lenders are making fewer loans. The loans that are currently being made are for the “perfect borrower.” Every day you read in the newspaper how people who were in the process of buying a house have had to forego completing the transaction because they no longer qualify for the mortgage. You will need to prove a strong, reliable income stream and not just a large down payment to qualify in this market.
I want you to be realistic as early in your divorce process as possible - that will give you time to be creative. If you are amicable with your spouse, see the same mortgage broker and determine how you might create a win-win for each of you. A Certified Divorce Financial Analyst (CDFA) will also be able to help you sort through the information and strategize a favorable result, or at least realistic one.
And always trust but verify!
My recent book, Fair Share Divorce for Women provides worksheets and strategies to make the right financial decision for you and your family.