“I’m an excellent housekeeper. Every time I get divorced I keep the house.” -Zsa Zsa Gabor
In many divorces, the parties’ marital home is their most valuable asset. Most have purchased the home and lived in it for many years; renovating, updating, paying extra towards the mortgage in hopes of having a large chunk of equity when the time comes to sell. The “housing bubble” that burst set many of these folks back quite a few years. I will say though, that I am once again beginning to see people’s homes have substantial equity in them. Having equity is a great prospect when in the midst of a divorce because it gives the parties the ability to do one of two things: 1) sell the home and split the proceeds, or 2) one party keeps the home and “buys-out” the other party with other assets (think, retirement plans, money markets, etc.) Although all too many times have I seen the emotional connection to a home get the better of a client. I advise my clients to consider three very important items before making the decision to keep the home.
- Can you actually afford it? Many times the person who is not in charge of the finances in the home is unaware of all of the actual expenses. In many counties in Illinois, at the outset of a divorce, each party is required to fill out a financial disclosure statement. This is a packet provided by the court that itemizes income, assets, and expenses. This is a useful tool in determining the affordability of your home. If you don’t know, look at the packet that your spouse submitted. Here are the big ticket items to consider:
- Mortgage? Is there more than one? Do you have a home equity line (HELOC)?
- Taxes? Are the taxes being escrowed with the mortgage payment or are they going to come due twice a year?
- Insurance? Do you have adequate homeowner’s insurance? Is this included in your mortgage?
- Upkeep? Snow removal, yard care, pest control, housekeeping service?
- Utilities? Water, gas, electric, trash, sewer, internet, cable?
- Repairs? What shape is your home in? Roof, windows, water heater, etc.? Will something need to be replaced soon?
- Furniture? What if the spouse who moves out takes half of the furnishings, how will you re-furnish empty rooms?
Now that you know the “hard” costs of the home. Can you still pay for your car, food, clothing, children’s expenses, and other miscellaneous costs? If you will be receiving maintenance and/or child support, now would be the time to ask your attorney to run some rough numbers for you so that you may know what to expect.
This is also the point where many begin to get emotional, particularly if there are minor children in the home who attend public school nearby. There is no doubt that taking a child out of their home and school is difficult, but I assure you that it would be much more traumatizing for a child to see their parent not be able to afford a home and provide adequately for their family. One important thing to remember when going through a divorce is that the income(s) that were supporting one household will undoubtedly be stretched thinner when supporting two households. There is no way around it. You must put your emotions aside and if you determine that you cannot keep your home with your income, child support, and maintenance payments think of this as a chance to start a new beginning. To find a more affordable home, in a great neighborhood, where you will have additional money to do the things you want instead of putting it all into your home will likely be a much happier prospect.
2. Can you refinance?
Since the majority of married couples purchased their homes together, that means that both spouses are on the mortgage. Here is where some confusion sets in so check to see if you are actually both listed on the loan, not just as co-owners of the house. If you are both on the loan, this means that after the divorce, the person who has decided to keep the home will have to refinance the loan to remove the ex-spouse from the mortgage. A refinance will place only one person on the loan and remove the other person. So you can automatically see why lenders are hesitant to do this in the first place. Now there is only one person responsible should the mortgage stop being paid. Removing a person will free up that spouse’s credit so that they may obtain a home for themselves and not have the current mortgage count against their income-to-debt ratio. Now, to refinance, most mortgage companies require 6-12 months of steady income. If you intend to use your child support and maintenance payments that you will be receiving, then you would have to wait 6-12 months after the divorce (depending on your lender) for those payments to count. I have sometimes seen lenders accept your Judgment for Dissolution of Marriage as proof of payments to come, but not often. When a client of mine begins to show interest in keeping the marital residence, I always advise them to speak to a mortgage lender first. If it appears a refinance will be possible, and all of the other factors have been considered, then things may go well. If it appears that a refinance will be impossible, then keeping the house after the divorce is unlikely. Most Judgments will require the refinance within 12 months (however, this item is open for negotiation), but if a refinance is not completed within the timeframe specified, then that party could be in violation of the Judgment. If in violation, you may be forced to sell the home or give the other spouse the option to buy it back. Coming back to court after the divorce is something nobody wants to do so I suggest doing your homework on this issue long before making your decision to retain the house or not.
3. Are there sufficient assets in your marital estate to “buy out” your soon-to-be-ex’s share of the residence?
If you plan to keep the house, and there is equity in the home, you will have to figure out a way to purchase your spouse’s interest in the house. Now, there are many considerations here but the most common is an offset of retirement accounts. By way of example: A married couple owns a home with a fair market value of $310,000 and a mortgage balance of $250,000. This means that there is essentially $60,000 in equity in the home. If we are dividing the assets in the marital estate equally, each party should receive $30,000. (Generally speaking we do not consider “closing costs” when transferring an asset like this pursuant to a divorce but this is a negotiating item and something you should discuss with your attorney.) If the parties also have an IRA worth $100,000, we again assume each receives $50,000 from that account. So, if for example the Wife wishes to keep the home, then instead of receiving $50,000 from the retirement account, she would only receive $20,000 from the IRA and the Husband would keep $80,000, thus essentially paying the Husband the $30,000 she owes him for keeping the house. It becomes much more difficult when the assets in the estate are insufficient to complete such a “buy-out” so take a good look at what your net worth really is and consider this before making the decision to keep the marital residence.
If you closely consider your position using these three factors, you may determine that you are in a financially sound position to retain your home. If however, one or more of these factors is not “adding up”, I suggest that you consider moving on and starting anew in a home that may suit your financial situation better. Do not think of it as a loss as this could be a good opportunity to make a fresh start.
Nothing herein should be considered in place of tailored legal advice for your specific situation. No attorney client privilege exists simply for reading this blog. This is for informational purposes only. I always suggest speaking with an attorney.
Looking for divorce, custody, support, maintenance, or other family law representation in Cook, DuPage, Kane, Kendall, or Will County? Contact our office to schedule a free 60 minute consultation.
Lindsay C. Stella, Esq.
Mirabella, Kincaid, Frederick, & Mirabella, LLC
1737 S. Naperville Road, Suite 100
Wheaton, Illinois 60189