Around 40% of first marriages in America end up in divorce. Although the overall divorce rate has been declining, so is the rate of marriages. According to the UN, the the United States has the third highest divorce rate in the world (the Maldives comes first and Belarus is second, in case you were wondering). Furthermore, the divorce rate for second marriages goes up to 60%, and for third marriages, it is over 70%. Why the statistics? Well, since the financial recession of 2008, the process of getting a divorce has not changed so much, but the housing market – particularly the mortgage market – has. This means dealing with a mortgage in divorce is trickier, and getting a new mortgage or refinancing the existing one is a lot more difficult.
How 2008 Changed the Mortgage Landscape
The financial crisis in 2008 sent a number of banks and other lenders under. The repercussions were felt far beyond Wall Street where generous Federal bailouts saved some institutions. An environment where a 125% mortgage against the value of the home meant many were borrowing beyond their means, and when interest rates went up, many people were unable to pay their mortgages, and the foreclosure crisis began. As a direct result, mortgage lenders began to tighten the rules and regulations for new mortgages. Couples who married and got a mortgage prior to 2008 will find the landscape completely altered from before. This now means that a house may still be a divorcing couples greatest asset if it is (largely) paid off, but if there is a large mortgage – or if it is “underwater” – it can become their greatest liability.
Mortgage Options for Divorcing Couples
If a divorcing couple has an outstanding mortgage, there are a range of options for them to consider. The easiest is to sell the property before the divorce is final. If both are in agreement and the value exceeds the mortgage this can be profitable for both parties. However, sometimes the mortgage exceeds the value of the home – which might mean a short sale, which affects taxable income and both spouses’ credit rating. In such circumstances it is sometimes possible to gain more profit from renting the property out and splitting any profit in half while chipping away at the mortgage and/or waiting for the housing market to recover in your area.
If one spouse wishes to keep the house, they should refinance the home in their own name and take the other spouse’s name off the title. Even if the divorce is friendly, don’t trust your ex-spouse to pay off the existing mortgage; if they fail to do so, you will be liable for the debt. Your best bet is to make sure the mortgage is paid off and the house has been refinanced before the divorce is final.
How to Develop an Equitable Plan
When settling a divorce, both parties should think about the long-term as well as short-term impacts on both spouses. In an acrimonious divorce, short-term revenge or trying to gain an advantage over the other spouse can seem tempting. However, employing a financial professional with knowledge and skills in the divorce arena, such as a Certified Divorce Financial Analyst (CDFA), can be of great value to a divorcing couple. These financial experts are able to make a objective, logical assessment of both financial assets and liabilities. This means they can break down the issues, the incomes, what you own and what you owe, then create scenarios showing what happens if you accept Settlement Proposal A vs. Settlement Proposal B.
Mid-Divorce and Post-Divorce Mortgages
As a result of the 2008 crisis noted above, lenders have tightened how they lend. The market has improved in recent years with the number of new mortgages slowly increasing and some flexibility coming back into the market, but lenders are still wary. If one or both ex-spouses decide to take on a new mortgage, they will need a greater deposit, better wages, and will be borrowing at a higher rate with more restraints placed upon them. If done during a divorce, any existing mortgage will count against them both for getting a second mortgage and even for renting. Post-divorce, obtaining a new mortgage using only one person’s salary is naturally more difficult than with two salaries – unless perhaps you were the higher wage-earner during your marriage, and you are not facing having to pay spousal and/or child support for years into the future.
Regardless of the mid- and post-divorce landscapes, making level-headed, logical decisions about whether to sell or keep the marital home, and whether to rent or buy post-divorce, is best for everyone in the long run.
Jess Walter is a freelance writer and mother. She loves the freedom that comes with freelance life and the additional time it means she gets to spend with her family and pets.