Divorce and the Family Home: Stay or Go?
When facing a divorce, it’s common for one spouse to express a desire to stay in the family home. This can be for a number of reasons. The spouse may want to minimize disruption in the lives of the children. Or they may simply want the comfort of familiar surroundings as they face dramatic life-altering changes. Under these circumstances, many profound emotional forces can be at play.
Set emotions aside and ask yourself, does it make financial sense to retain the family home? Before making your decision, make an effort to undertake a realistic assessment of your situation. You can start by considering these four factors:
1. Market conditions and Current Home Value. The first step in this assessment is to evaluate the conditions of the residential real estate market in your area and how your home ranks. A real estate professional can help you evaluate your home against “comps,” or recent sales in the area. But an appraisal may be the most accurate indicator of your home’s current value.
Don’t automatically assume that you and your spouse will share equally in any equity or shortfall the transaction may generate. A certified divorce financial analyst can evaluate your circumstances and determine the rightful share of each spouse. If you wish to retain both the home and its equity, you will have to buy-out your spouse’s share as part of the divorce settlement. This may mean less cash up front, or a reduction in spousal support, which may mean staying in the family home is unaffordable.
On the other hand, if market conditions are ideal, your home may sell quickly. This means each spouse may have the opportunity to take his or her share of the equity and move forward. But if the home is “under water,” meaning more is owed on the mortgage than the home is currently worth, you may want to explore other options. These include renting the home to a third party, or “birdnesting,” whereby each spouse co-owns the home, leases a small residence nearby, and trades-off stays in the home with the children.
2. Mortgage Qualification. Retaining your current residence will most likely require you to seek refinancing. While you may think you qualify, a mortgage lender may disagree. A lender will evaluate your credit score and weigh other factors to determine if refinancing is a viable option. In general, refinancing will not be considered if the mortgage payment exceeds 28 percent of your gross monthly income, or if your monthly debt payments exceed 36 percent of your monthly income.
3. Costs of Other Options. Determine if affordable housing options that meet your needs exist in your area. Depending on rental market conditions, the cost of similar living quarters may be substantially more or less than your current mortgage payment. If you need to downsize to afford a new home of your own, be sure to factor moving and storage costs into your decision.
4. Buyouts. In a buyout, the spouse retaining the home makes a payment to the other spouse to cover their share of the home’s value. This can be achieved either by refinancing the home and making a lump sum equity payment, or by surrendering a requisite share of a claim on other assets, such as retirement accounts. But be aware that over time these assets may prove more valuable than the home itself. There may also be tax advantages to selling your share of the home now, versus years into the future as a sole owner. A financial expert, such as a Certified Divorce Financial Analyst, can help you evaluate which course is in your best long-term financial interest.
The emotions and details surrounding the decision to retain or sell the family dwelling can be overwhelming. So it’s important to put aside emotions as much as possible and direct your energies into making a realistic assessment of your circumstances. Consulting a neutral financial expert to facilitate a sound decision may be your best move.