Can a Divorced Couple Continue to Own Their Home?
You and your spouse have decided to move forward with the divorce. But, you are still underwater on your primary home, or maybe you don’t have enough equity yet for whoever wants to stay to refinance. Don’t despair. There are still creative solutions for this scenario even with the housing market collapse behind us.
In all actuality, I have helped clients who just were not ready to face house hunting on top of the major life change that divorce throws at you. In this scenario, the wife wanted to remain in the home with the children for two more years, and then think about the refinance. The husband agreed that the wife could stay as long as it didn’t jeopardize him or his financial future.
So how can this work? First, the couple will have to decide if they will both participate in the growth of the equity for the next few years or not. For today’s illustration, we’re going to say “yes”, both will participate.
Here are the other pertinent details: Mortgage payment with taxes and insurance is $1500 per month. Market rental rate would be $2700 per month.
So, think of it this way – both parties are basically now landlords of their home and will invest in it 50/50 until it is either sold or refinanced at a date two years from now. So they will split the costs that a landlord would typically pay; mortgage, interest, insurance, major repairs and maintenance. The wife has to “rent” the home from them both. So her “rent” is $2700 to the couple, half of which is hers, meaning in addition to her half of the mortgage, $750, she must also pay $1350 rent for a total of $2100 per month plus any utilities and monthly upkeep. Since the total mortgage payment is $1500, she can just pay it and then pay Husband the difference of $600 per month. Each year, they will split the deduction for mortgage interest and taxes.
An important benefit of this arrangement is that if Husband wants to buy a new home on his own, this scenario allows him to offset his portion of the mortgage payment with rental income to help preserve his ability to obtain a new mortgage if he chooses. It’s not rental income in the eyes of the IRS. There’s no actual lease agreement but if the decree clearly lays out the agreement most mortgage underwriters are not penalizing the non-resident spouse.
The important thing in a scenario like this is ensuring that protections be written in for the non-residential spouse. Typically it will be required that each month the payer spouse must provide proof of mortgage payment and if at any point, the mortgage is more than 30 days past due, the non-resident spouse can order the sale of the home immediately. This gives at least some sort of protection in the event that the mortgage payments become too much to handle for the remaining spouse. They also will need to re-title the home from Joint Tenants to Tenants in Common. That way, if anything happens to either of them, their ownership in the home goes to their estate, not their ex.
Our goal at Smarter Divorce Solutions is to help couples manage a kinder, gentler divorce. Where there’s a will there’s a way and if you and your spouse are amicable enough, we can help you make this work fairly easily. Contact us for a Strategy Session.