Divorce and the marital home: Part Two
A divorce is one of the most dramatic and profound financial transaction in most adult’s lives because it divides so many different assets and liabilities. Because of the nature of divorce, it’s virtually impossible to have more money afterwards than you did beforehand. Think about it: you have a certain number of assets, and you have to divide them in two. Not only that, but now you and your husband will have separate rent or mortgage payments to make, separate utilities, and even separate grocery bills. The same money will now be used to maintain two separate households. It’s tough.
When you think of dividing your assets, one of the first things you probably thought of was your marital residence. The house is, for most couples, one of the most valuable assets in a portfolio. It’s only natural that one of your first questions is “What on earth is going to happen to the house?”
It’s also a sentimental asset. Because you purchased it with such high hopes for your future, and probably raised (or began to raise) your children in that house, it’s special to you. It sheltered you from the rain and kept you feeling warm and content in the snow. It represented so many things to you—the American dream, your ideas for your shared future, and stability and continuity for your children. It got you into a good school district, and it made the life you wanted to live possible. It’s hard not to feel a little sentimental.
You have a number of options for what to do with your house after your divorce. On Monday, we talked about several of those options. Today, we’re going to talk about the last two: keeping the house (as in, the two of you keeping it together), and foreclosing on it.
Before we go too far, I want to offer one caveat for you if you’re thinking of refinancing the house and keeping it yourself. We talked about this option a little bit on Monday, but I have one more final thought for you, before we move on what happens if the two of you keep the house together.
“I love this house; I’ve just got to keep it!”
I get it. You love your house. I love mine, too, and it would be hard for me to walk away, no matter what happened. Still, just like when you bought your house, you have to step back and look objectively at the situation. Is the house really worth the continued investment?
A lot of times, we recommend that our clients, before re-purchasing their homes (because that’s what you’re doing when you negotiate a buyout and then refinance the remaining balance of your mortgage), hire someone to do a home inspection and a title search.
I know, I know. It sounds crazy, right? But so many things that can go wrong with a house are invisible until you conduct a home inspection. Before you take on a lot of debt on your own, you should double check and make sure that everything checks out. It’s probably fine, but we’ve heard some really terrible horror stories about cases where it wasn’t fine, and things like that can ruin people financially. What if there’s a crack in your foundation, and it’s going to cost tens of thousands of dollars to fix? What if there’s a tax lien on your property that you didn’t know about? Sure, you’re attached to your house, but you’re not so attached that you can totally turn a blind eye to things that are so obviously possibly financially ruinous.
You wouldn’t buy a new home without a home inspection, so why would you agree to buy your own without an inspection and a title search? You wouldn’t, and you shouldn’t. Make sure that everything checks out before you obligate yourself to make a long term decision that you might regret.
Not only that, but, for the repairs that do have to be made, when you find out exactly what they are, you can enter into an agreement with your soon to be ex husband about how the repairs will be made (and paid for). It’s pretty customary that sellers will fix up their house after they get the verdict from the home inspection guy, so why should your husband get to skip this step? (In reality, what will probably happen is that you’ll reduce the amount you have to pay him for his interest in order for him to cover his half of the necessary repairs. It’s possible that he could just pay out of pocket, but it’s unlikely.)
Keep the house
It’s unusual, but sometimes couples choose to keep their house, even after their divorce. Usually, we see this when the property isn’t in a position to sell for top dollar, or when the couple has a longer term investment strategy that they plan to maintain even after their divorce. Again, it’s super unusual, but it does sometimes happen.
In situations like this, it’s important to have a carefully thought out separation agreement that spells out all the terms, arrangements, and contingencies relating to the property. Who will pay for maintenance and repairs? Utilities? Taxes? Fees? Do you plan to have a renter or use a property management agency? At what point will you decide to sell? Do either of you have the ability to perform maintenance and repair work yourselves? How will you determine who your listing agent will be? What happens if you don’t agree about what to do with the house? It’s important to make sure that your separation agreement takes all these possibilities and eventualities into consideration, and comes up with solutions that address your concerns before they arise and create friction.
If you plan to keep your home after your divorce, you’ll probably want to talk in some detail with your husband about your long term plans for the property. Spell out certain conditions, and make sure you both understand each other. Talk to an attorney, if possible, to discuss ways of drafting your agreement so that you’re as protected as possible in the event of some unforeseen circumstance.
Beware, though. If you and your husband keep the property, it may affect your ability to qualify for financing on another place to live. The laws have changed since the housing market crashed, and it’s more difficult than ever to get into a new home, particularly if you have an old one with a mortgage still lingering around in the background. You may be required to have as much as six month’s worth of reserve mortgages for BOTH properties in order to close on a new one, even if you otherwise qualify for the mortgage. (The mortgage companies have been burned before by people who claimed to want to rent out their old homes and then ditched them and let them go into foreclosure once they had secured their second home.) Ask your mortgage broker for details, and he should be able to point you in the right direction if you’re considering keeping your old house but still plan to purchase a new one.
Again, the lesson is that you should make sure you talk to all the required professionals (or negotiate an agreement that is conditional) BEFORE you sign something that obligates you to keep the house or refinance it. In any case where you’re expected to remain financially on the hook, you should do everything you can to talk to competent professionals about whether this course of action is truly advantageous for you. Either negotiate an agreement that gives you an option to exercise this course of action (or not, if it might be financially damaging in some way), or refuse to sign an agreement until you’ve had the opportunity to talk to an expert about your options.
Foreclose or short sale
Obviously, no one wants to foreclose on their house, or be forced into a short sale. I don’t present this to you as an option or a possibility (because I couldn’t, in good conscience, recommend that you take an action that would be so obviously detrimental to you in the long run), I just tell you because, theoretically at least, if you’re wanting to get rid of a piece of property, this is technically one way to accomplish that goal. I’ve heard of people leaving their houses to be gobbled up by the lending banks, especially in cases where they owed dramatically more than the house was worth, but in most cases this is a terrible option that can have crippling short and long term consequences.
If this is an option you’re considering, it’s a good idea to talk to an attorney or financial professional before you take any steps that you can’t take back later. It’s an option, of course, but you should be sure you’ve tried to exhaust every other possible means before you take such a drastic step.
So, what should you do?
Ultimately, the choice is totally up to you. Whether you choose to sell the house, negotiate a buyout, purchase the home yourself, keep it jointly, or foreclose or short sale on the property, you should be sure that you’ve talked to a qualified professional who can give you advice on what may be best for you in the long run. Of course, there are no crystal balls, so it’s impossible to know what may happen over a period of time. All you can do is make the best decision possible under the circumstances and know, at the end of the day, that you did the best you could with the information at hand.
You should look carefully at your financial picture, and come up with a solution that addresses as many of your concerns as possible. Leaving emotion out of it, do the best you can to look objectively at the facts and take your long term financial goals into consideration. Make sure you avoid the common mistakes and pitfalls I’ve indicated here, and don’t be afraid to ask for help if you need advice and guidance.
The marital home is probably one of your biggest assets, so you’ll want to make sure that, whatever happens, you’ve done the best you can to provide for yourself over the long term. If you’re concerned about what to do with your home or have questions about what might be the best option for you under your specific circumstances, please feel free to give our office a call at (757) 425-5200. We’ll be more than happy to set you up with an appointment with one of our licensed and experienced Virginia divorce and custody attorneys, who can help give you advice on how to move forward.