Divorce can open a whole new world of opportunities, but you may not be ready to change everything all at once. For spouses who own the marital residence, it's not uncommon for one spouse to want to keep the home. If you're considering refinancing to keep your home after your divorce, consider certain financial realities to make the best decision for your financial future.
Negotiating for the Residence
A spouse wanting to keep the marital residence may negotiate for it during the property settlement. Generally, each spouse owns half the equity in the marital residence, and the spouse keeping the house must pay the other his share, either by including it in the new mortgage loan and paying him cash, or through other marital assets of comparable value. An exception exists in equitable distribution states, where the court may decide to award one spouse a greater than one-half share of the equity to compensate for financial inequalities, such as lower income or expenses related to residential custody. Regardless of the division, once you know your spouse's share, you can calculate the loan amount.
Once the approximate monthly mortgage payment is known, the refinancing spouse can decide whether she can afford to keep the house. Housing expenses should be kept below 28 percent of gross monthly income. These expenses include the mortgage payment, insurance and taxes. After divorce, gross monthly income includes salary, spousal support and child support.
Qualifying for the Loan
A refinancing spouse must qualify for her own mortgage. Refinancing drops the other spouse's name from the mortgage obligation. Choosing a mortgage company that engages in manual underwriting can be important in securing mortgage approval for a divorcing individual applying on her own, especially if credit is less than perfect. With manual underwriting, a qualified person, rather than a machine, processes mortgage applications for the lender and considers explanations of negative credit items, as opposed to automated underwriting done by computer.
Dividing the Asset Equally
Including the terms of the buy out and refinance in the property settlement agreement nails down the obligations of the spouses. For example, the agreement could include the buy-out amount and method of payment, require execution of a new deed in the refinancing spouse's name, and set a deadline for the buy-out completion. If the spouses agree to a buy-out but can't agree on terms, the judge decides the terms for them. In equitable distribution states, the judge can order the buy-out by awarding the house to one spouse if he decides it's necessary in the interest of fairness. Generally, factors considered are spouse ages and health, length of marriage, respective contributions to the marriage, income and assets, employability and skills and whether one spouse is the residential custodian of minor children.