One of the biggest financial (and emotional) decisions to be made during a divorce is deciding what happens to the marital home. Deciding what to do with the home during divorce might not be as simple as who keeps the property and who moves out.
If the divorcing couple is mediating the disposition of the marital home, the goal is to close the gap in the negotiation and ultimately come to a solution that works for both parties. This may be easier said than done when emotions, finances, and even children are involved.
From a financial perspective, there are usually two options on the table:
Option 1: Sell the marital home and split the proceeds.
Option 2: One spouse retains the property and compensates the other spouse for their share of equity ownership.
The second option can be achieved in various ways; however, the two most common are:
- The spouse retaining the marital home refinances the current mortgage and pays the vacating spouse their ownership equity from proceeds with the new mortgage.
- The spouse retaining the marital home may give up rights to other marital assets to compensate for the equity advantage in the marital home.
While coming to a mediated agreement as to how the marital home will be divided is an important step, equally important is making sure that the spouse retaining the marital home can actually qualify for new mortgage financing once the divorce is final. When this important step is overlooked, future frustration, potential litigation, and the failure to execute settlement orders are a big risk.
Including divorce mortgage planning into mediation, with the help of a CDLP™, can help identify possible solutions and assisting both parties to let go of counterproductive positions and emotions while taking stock of possibilities, resources, and solutions.
An Equity Buyout Preapproval should also be required by the spouse retaining the marital home if new mortgage financing is required. A refinance due to a divorce is required to remove the vacating spouse from the current mortgage or when the in-spouse needs to buy the equity ownership from the out-spouse in cash form.
- An Equity Buyout Preapproval allows the Certified Divorce Lending Professional (CDLP™) the ability to account for all income requirements, joint and individual debt, and assets needed to successfully provide mortgage financing.
- An Equity Buyout Preapproval can eliminate the fear of selling the home should mortgage financing not be obtainable by the in-spouse if ordered in the divorce settlement agreement.
- An Equity Buyout Preapproval can prevent the need to return to litigation due to the inability to fulfill the requirements of the divorce settlement agreement.
- An Equity Buyout Preapproval will provide all parties with a sense of confidence that there will be no issues obtaining mortgage financing once the divorce is final and alleviate any concerns of failure to execute.
What’s the difference between prequalification and preapproval?
A prequalification generally means that a mortgage professional collects some basic financing information from the borrower to estimate how much of a mortgage they can afford. A preapproval takes it one step further by verifying the financial information you submit to get a more accurate amount. This means that an Equity Buyout Preapproval is a stronger sign of what the borrowing spouse can afford and adds more credibility to the lending strength of the borrower.
A successful divorce settlement is a result of putting the pieces of the puzzle together in such a manner that both divorcing spouses come out of the divorce whole. Each member of the professional divorce team should bring value and perspective that benefits the overall outcome and success.
Working with a Certified Divorce Lending Professional (CDLP™) and incorporating Divorce Mortgage Planning into the divorce settlement may help both spouses obtain new mortgage financing post-divorce.
Contact a CDLP™ today for a copy of the Divorcing your Mortgage Homeowner Workbook, a guide to credit, real estate, and mortgage financing after divorce. This workbook will help you get organized, be prepared, and understand your mortgage financing position whether you are needing to refinance the marital home in an Equity Buy-Out situation or prepare to sell and purchase a new home post-divorce.
As a divorce mortgage planner, the CDLP™ can help divorcing homeowners make a more informed decision regarding their home equity solutions while helping the professional divorce team identify any potential conflicts between the divorce settlement, home equity solutions as well as real property issues.
If you need home financing or have any questions about the lending process, please visit our website and contact us today for more information.