Should I buy, sell, or refinance my home while I’m separated?
Being legally separated isn’t a comfortable place to be. Whether you’re living separate under the same roof or you’ve actually physically separated from your soon to be ex spouse, it’s not a period of time that many people look back on fondly. No matter what choices you’ve made, it’s a period of transition, and it’s incredibly uncomfortable.
I don’t think anyone makes the decision to divorce lightly. In fact, my experience over the past decade has shown me quite the opposite. No women think that it’s no big deal to get divorced. Whether the marriage was three months, three years, thirteen years, or thirty years, it’s a huge deal to the parties involved. It’s a serious decision.
But with the decision to divorce come a lot of other decisions. First and foremost for a lot of people is a big one: “Where will I live?”
Most of our clients also own their own home. For them, one of the earliest decisions they start to try to make relates to the home – whether they’ll keep it, sell it, or buy a new one – and they’d really like that decision to be made, you know, immediately.
In general, though, my advice is the same across the board. Whatever you’re trying to decide – whether it be related to the home or something else – it’s a good idea to get a signed separation agreement in place first.
A separation agreement is the legal document that divides all your assets, liabilities, and responsibilities between the two of you.
A separation agreement handles everything – spousal support, child support, custody and visitation, retirement, division of the bank accounts, cars, and more.
Without a signed separation agreement resolving the issues in your divorce, how do you know whether you can afford a house – and, if so, how much house?
My biggest concern is always whether my clients can really know what they can afford without having negotiated the separation agreement first. Without knowing what your spousal support will be – if any – can you buy a home? Without your child support, would you qualify for the loan? How much will your car payment be? Do you keep your current car?
Home ownership comes with a LOT of expenses. Can you afford those?
It’s also a question of whether you can afford the expenses that are adjacent to home ownership. It’s not, after all, just a question of whether you can make the mortgage work. It’s a question of all of those things that go into escrow – taxes, insurance. Not to mention the cost of repairs and maintenance, which doesn’t even go so far as to touch on actual improvements.
Having recently had the landscaping done at my own house (after, I should add, replacing all the windows and a roof, also within the past year), I can tell you: home ownership is EXPENSIVE. You’ll want to factor in the cost of other things, like lawn care and maintenance, that maybe your husband took care of during the marriage. Maybe that isn’t even something that’s on your radar because it was always taken care of, but, post divorce, things will look a little different.
Don’t forget the refinance!
And refinancing! Remember that, too. If you want to keep your current home, you’ll likely have to buy out your husband’s interest.
Sure, if you negotiate a separation agreement, it’s possible you could work something out – like, your share of his retirement for his share in your house. But, either way, it’s a net cost to you. You’ll have to account for his share of the equity.
And, if you do that by actually buying out his interest, your mortgage will go UP. You’ll also have to account for closing costs somehow.
Don’t forget to consider interest rates, too. Most of the time, we refinance when interest rates happen to be lower – but when you do a refinance because of a divorce, you refinance at the time that you need to, to remove your husband’s name from the mortgage and/or deed of the home, regardless of whether the interest rate is as good as it could be. That can cost you, too.
What if we just don’t refinance?
I get this question a lot, too. There are costs to a refi. So, what if you just..skip it? Well, needless to say, that’s not smart. And it’s also probably not something that your husband would agree to.
You have to refinance to get him off the mortgage, if he’s on it. If it’s just your name on the mortgage, you could get away without a refinance – but you’ll still have to take steps to update the deed.
You’ll want your ownership of the home to be clear, and he’ll want his name off the mortgage – because, if not, it’ll show up on his credit report, creditors could come after him if you didn’t pay, and he’d have a harder time qualifying to rent or buy another place. (And the same goes for you, in the reverse scenario, where he’s trying to buy you out.)
You might be able to work in a grace period before you have to refinance – 30, 60, 90, 120 days, whatever – but that’d ultimately be down to whatever you and your husband can agree to.
What about your down payment?
You’ve probably heard, but the housing market is crazy right now. People are making all cash overs, well over asking price. And forget about closing cost assistance!
You’ll likely need a down payment. Do you have it? Well, probably not, without some sort of settlement in place. Most people – I can tell you from experience, after having looked in detail at hundreds of people’s financial stuff – don’t have down payments just sitting in their bank accounts. And, even if you do, it’s probably marital money, so it’ll also need to be divided in the divorce. Will he let you just take it for a down payment? Will it start World War 3 if you do? It might not be worth the consequences!
Will you make it through underwriting?
Underwriting is SUCH a headache! I swear, every time you go through, they make up all these random other things they’ve never mentioned before that you HAVE TO HAVE.
When I bought my second house – we were going to keep the first as a rental – they randomly decided during underwriting that they wanted to see six months worth of the rental house’s mortgage in our bank account. That had never been mentioned before! Sure, that may not be your situation, but just to illustrate that it may be more difficult to make it through underwriting than you think, especially if you don’t have a clear cut picture of your financial future.
If you want to buy a new house, or even just refinance your current house, you’ll have to satisfy the underwriters that you have the wherewithal to make the mortgage payments. If you’re counting on spousal support that is not in writing or child support that hasn’t been awarded yet, you may find that it’s impossible to secure a mortgage, anyway – even if the support you think you’ll receive actually does get awarded later and you could have afforded the mortgage.
But what about spousal support and child support? I’ll definitely get some support.
In general, in order to “count” the spousal and child support you receive, you’ll actually need to receive it for at least three months anyway. The underwriters will want to see the deposits into your account, and see your separation agreement or divorce decree or other court order providing that you’ll receive that amount for a certain period of time. (Remember, too, that child support is modifiable based on a material change in circumstances, and spousal support can often be modified, too.)
I’m not saying you can’t afford your home, or a different home. What I am saying, though, is that there are a lot of variables – both in your divorce and in the quest for home ownership – that can make things more difficult if you don’t have an accurate financial picture.
It’s best if you negotiate a separation agreement and have a real, solid sense of your overall financial strengths and weaknesses before jumping headfirst into home ownership. It can come with a lot of hidden costs, and you’ll want to be sure you can meet them. After all, there’s absolutely no benefit to you from being house poor or, worse, from having your house foreclosed.
Make your decisions, but make them informed. For more information, or to schedule a consultation with our office, give us a call at 757-425-5200.