Divorce is never easy. When a divorcing couple owns a house, it makes dividing up the assets that much harder. As challenging as it may be, it is important for divorcing spouses to think of the marital home decision as a financial one and not an emotional one. So, before you try to figure out WHO keeps the house, it might be worth discussing whether the house is WORTH KEEPING in the first place.
One of the unfortunate things I have experienced in many divorce scenarios here in New Jersey, is where one spouse insists on keeping the home even though it is not a prudent financial decision.
It's important to try to put the emotions aside when you're trying to decide to keep your marital home. You REALLY need to make sure it really is the best move for you and your family. Because as emotionally trying this can be, a wrong move concerning a home can come back to haunt you for many years – long after the divorce over.
Here are 15 things to consider;
1) The real value of your home — Home prices have skyrocket. If you own a home chances are that it has gone way up in value since you purchased it. So, in addition to that sentimental value, it is also likely that your home has a lot of market value, which can be both a gift and a curse in the context of a divorce proceeding.
Most soon-to-be-divorced couples, believe they have substantial equity in their homes, but these high values of real estate often dwarf the rest of the marital assets, thereby making the decision of what to do with the house even more challenging. For the purposes of dividing assets in a divorce, determining the value of certain types of assets is not as straightforward as looking at an account balance or even finding the fair market value. The “value” of the real estate in the divorce context is not necessarily in the fair market value, but in the equity in the real estate. To determine the equity in the property, you need to establish the fair market value and then subtract any existing encumbrances (i.e., mortgage, home equity line of credit, lien, etc.).
Do you have a lot of deferred maintenance? Does your house need to be ‘updated?’ The truth is, almost no homeowner really knows the condition of their house until they’re getting ready to sell it. Even then, you won’t have a true idea of what you’re in for until a real estate agent gives you their honest assessment.
2) What are you giving up — The spouse who keeps the home might be asked to forego some other marital assets, such as investments, cash, vehicles, or ownership in a family business. Depending on what other assets you have, it might be difficult to figure out each person should walk away with. In that case, having a recent appraisal or comparative market analysis will help you determine what’s fair.
3) House rich and cash poor — One of the benefits to getting married is being able to consolidate living expenses. This includes only having to pay for ones home. Many couples buy the biggest house they think they can afford. When getting divorced, the exact opposite happens—someone moves out, and living expenses go up. If you were one of these couples, and the mortgage and other expenses stretched your budget before the divorce, how do you think this will play out afterwards? Do you really want to spend all your money on a house, instead of a life?
4) Staying in your current home — You need to do is determine why you want to stay in the home. For a lot of people that I talk to, it has to do with kids. Either the kids’ school district is the school district that they want to be in, or they want to stay in that neighborhood because all of their friends still live in that neighborhood. And they feel if staying in your family home, will provide some sort of stability for your children, especially when they are dealing with an unstable situation.
You need to consider where your stability really is. A lot of the time, your support group (your parents, your siblings, your friends) have moved to different areas, if that's the case consider moving into a smaller home, maybe one that's move affordable and also closer to the people that are really important to you.
5) Co-owning a home with your ex — While there are the rare few couples who can continue to co-own a home until all the children have all graduated from high school, I have seen many others for whom this type of arrangement has simply turned into a never ending nightmare.
Even though they are divorced, they have to spend years listening to their ex constantly complain about how they are taking care of the house. (he or she doesn’t like the color they painted the house, or the shrubs aren’t trimmed correctly, etc.). While they find this invasive, their ex feels that since the house is “still technically half theirs”, and therefore, they have every right to dictate what they do or don’t do to the house.
That’s why in most cases, whenever possible, it is a better idea to disentangle yourself from your spouse as efficiently and quickly as possible. Depending on your situation, your divorce attorney may counsel you to do whatever it takes to disentangle your day-today living situation from that of your spouse.
6) Keeping Up Mortgage Payments — Although some people don’t think about this issue, one thing that can’t be forgotten is keeping up mortgage payments. Because you were married, there is an excellent chance that your mortgage is based on both of your incomes. Cut that salary in half, and you understand very quickly why the home you managed to buy required both of you to pay for it. Not keeping up regular mortgage payments is the reason homes are repossessed by banks and other home loan lenders. Unfortunately, no exceptions are made for people going through a divorce. Someone needs to keep paying the mortgage.
7) Keeping the Mortgage You Have — If your heart is set on keeping your home but you cannot qualify for a refinance, ( which lets be honest, is still harder for woman), one of the only options you have left is to keep the mortgage that you have. This is a risky move. You’ll need to convince your spouse to keep paying his half of the mortgage or find a way to buy him out of his share. If he does agree to keep paying the mortgage (perhaps to ensure his children get to stay in the home), you will be dependent on him. What if he loses his job or gets remarried and wants to buy a home with his new wife? At any time, or for any reason he could stop making payments. If, as a result, you default on your mortgage, you could lose the house, and both of your credit scores will be tarnished!
If you qualify for alimony, you may be able to work out an agreement with your husband so that he makes his required alimony payments right to the mortgage company. This can add more reliability to the process, but won’t help you if your husband loses his job, retires, or if he decides one day that he wants to sell the house.
8) Taking Over The Mortgage — If the spouse who wants the home has enough income, he or she could take over the loan and just make the payments. If you can accomplish this, it removes the other spouse from the equation altogether – therefore eliminating his or her liability – but not many people have this kind of income alone. So again, can you really afford the mortgage on your own?
Almost every divorced person underestimates what it will cost to pay all the bills on their own. Sit down and map out a realistic budget, and determine whether or not you can “really” afford to stay in the home, taking into account property taxes, utilities and regular maintenance and upkeep.
9) Capital Gains Tax — Today, a married couple will receive a $500,000 exclusion from gain, so capital gains tax is not so much of an issue as it once was, unless you have a higher priced home. Selling your home during a divorce means both spouses can exclude the first $250,000 of “gain” from any income which is taxable. If one spouse buys out the other’s interest in the marital home, only one of you has to worry about capital gains. If you are the spouse who is selling your interest in the marital home, then you don’t need to consider capital gains, since the sale of the marital home is considered a part of your divorce. If you are the one buying your spouse’s interest in the house, intending to live in, and later sell the house, then you will be subject to capital gains when you sell—although you will receive the $250,000 capital gains exclusion.
10) Bad Credit — While the act of divorcing doesn't directly hurt your credit, a divorce could indirectly lead to financial troubles that will hurt your credit. For instance, losing one of two household incomes and upkeep can all eat away at your finances that could cause financial strain that leads to missed payments on your credit cards, loans, and other bills.
Remember, if you create a poor credit history, you can’t divorce yourself from bad credit, the only thing that will improve your credit report is time. And if you are divorcing chances are you feel you already wasted enough time.
11) Bad Feelings — You need to determine whether you will really be happy staying in a home you and your ex lived in together. Will there be bad memories for you? Will you ever feel that this is truly your home rather than the home of you and your ex? These are very personal and important questions that require well-thought-out answers.
12) Status Versus Common Sense — We bank much of our image on our homes so without one, what are we? It might be time to trade in your status and image for reality and common sense. Our self worth isn't completely wrapped up in the square footage of our homes. The fact is though, houses are only a physical representation of our lives. A house has no feelings or attachments. It doesn't love us back.
It can feel strange moving from your large family home, into something more affordable. It feels like back-sliding, especially in our culture where owning a home is both a status symbol and a sign of adulthood. But this isn’t a time to worry about keeping up with the Joneses. This is a time for you to reset.
13) The Cost Of Freedom — Staying in your family home can be overwhelming at times with the maintenance and upkeep. Really think about how freedom you are going to have to live your new life when you have to worry about roof replacement, hardwood floor refinishing, broken hot water tanks or yards that are out of control? There is a freedom that can be found in occupying a smaller space. Be honest about your needs and your resources.
14) Consider Renting — Renting is actually often an excellent option. Renting, even temporarily, can give you that space to figure out what your new life is going to look like, and what you want to have for yourself without locking you into a house that might not be the best option for you, maybe even a year or two down the road. Another plus about renting is that you definitely do not have to worry about some of the upkeep and maintenance that goes along with owning your own home. And so if you take that into consideration, a lot of the times I hear from clients, they say, “Well, renting is more expensive. I could buy a house and my mortgage payment would be less than my rent payment.” But, keep in mind when you rent you're not paying for property taxes. And a lot of the times you don't have the upkeep, the maintenance, and all of those expenses that come with homeownership.
A lot of the time renting the right place can also free up your monthly cash flow. So then that way you can either pay down debt or you can start saving that nest egg for when you are ready to possibly purchase your next house. You have that freedom and cash flow to hold yourself accountable to those financial obligations or achieve those financial goals that are really important to you.
15) Consider Selling — If you are on good terms with your spouse, try to sell your home before the divorce is finalized. In today's market, you can get a great price for your house, and find a new house which will be beneficial to you both and help you get on with your separate lives.
Final thoughts on selling the house before divorce. The information in this article is general in nature, but please think long and hard before you decide that you definitely want to keep your house after divorce. Keeping the house may seem like a good idea right now, but it could burden you with huge financial expenses that will make it very difficult for you to financially recover after your divorce.
Recognize that you are going through a stressful period and your emotions will cloud your decisions. Try to focus on what is really important: Do you have a place to live (even temporarily)? Do you have a source of income? Are your children safe? Are your basic needs being met ? Do you have a support system?
Divorce can be emotional and the quicker that you can make some of these important financial decisions with confidence, the quicker you're going to be able to move forward and get a fresh start on your new life. Given the high values of homes in New Jersey, the disposition of the marital home may be the single most important financial decision to make in the divorce process. Seek the advice of trusted advisors (attorneys, financial planners, etc.) to evaluate your options before planting the for sale sign into the front lawn or deciding to take on an albatross of a mortgage by yourself.
If you are at a point where you are more confused than certain, it may be time to talk to a professional. Putting actual numbers into the equation, getting help from outside sources who will be more clear-headed than you, and taking your time to reach an important decision about your house that will all work in your favor.
Van Tassel Law is here to support you through each step of the way. I would love to speak with you and talk about your unique situation. You can give me a call today at (201) 664-8566 send me an email at laura@vantassellaw.com for a no-obligation consultation.