Real Estate and Mortgages: Strategic Planning for Divorcing couples
During a divorce, one of the biggest assets at stake is the marital home. While often thought about during the process, a strategy or plan is usually not put in place until the end or, even worse, after the divorce. There are ways to plan and prepare for the outcome during the divorce process, well before signing on the dotted line.
Why is it important to have a plan?
- Understanding your credit. Running your credit report will uncover the joint liabilities you share with your future ex, and will also help you protect your credit post-divorce. Consider freezing any future purchases on joint credit cards to prevent the other spouse from increasing any of your personal debt- which could be divided later on in the divorce. Knowing your personal credit score also shows your credit worthiness, and will give you a plan to start increasing that score while you are negotiating your settlement. Understanding your debt to income ratio will have an impact on your ability to obtain a mortgage sufficient enough to purchase a new property.
- Budget, Budget, Budget. Looking closely at the cost of maintaining your current home vs. downsizing or renting will help you determine if you can or actually WANT to stay in the martial home. If there is sizable equity in the home, and you determine that you’d like to sell or have your spouse buy you out, this could be a way to supplement post-divorce cash flow, and bridge the gap until you are able to increase your income or begin to draw from retirement assets without penalty.
- Considering the assets you will be getting after the split. I often work with clients who are the “out spouse”- meaning they have taken time off from work and have been the one raising the family, working part time, or are otherwise under-employed. Now you are looking at financing your current home with one income- which usually means your potential debt to income ratio won’t allow you to qualify for a conventional mortgage. Exploring portfolio loans and other means of financing with a Certified Divorce Lending Professional may help you obtain the financing needed to make that next step.
- Establishing temporary orders to being receiving child support and spousal support as soon as possible. When a divorcing spouse needs to use maintenance and/or child support as qualified income for financing, the income must meet two requirements: the borrowing spouse must show 6 months of receiving maintenance and/or child support, as well as 3 years of continuance in order to qualify. If this is maintenance and support begins after the settlement is signed, this timing may be to your disadvantage. By receiving temporary support early on in the process, it starts the clock ticking on the 6-month requirement. Keep in mind that whatever is established as temporary orders does NOT mean that this will be the final amount ordered- there is still room for negotiation. As long as there is one month paid (at a higher amount than the temporary amount), the borrowing spouse can qualify off of the higher amount.
- Determining the Capital Gains on the sale of your real estate. Current tax rules state that in order to use your capital gains exclusion on the sale of a primary residence you must have lived at the property for 2 of the last 5years. For divorcing couples, as long as the vacating spouse has used the marital home for 2 of the last 5 years, they will satisfy the ‘use period’ requirement. The most important detail is that the vacating spouse MUST remain on the title of the home to establish ownership. Current capital gains exclusions are $250,000 per person, or $500,000 per couple. It is important to work with your family law attorney and a tax planner to discuss your options, and ensure these details are included in your marital settlement agreement. Second homes and investment properties may also be subject to capital gains taxes, so it is important to determine the tax impact long before agreeing how to divide these types of properties.**
How can Collaborative Divorce Strategies help?
As divorce financial planners, we work with you to address these topics early on in the process. We assist you with current and post-divorce budgeting; we connect you with professionals who can assist with your lending and re-financing needs, and connect you with tax professionals to determine the outcomes and consequences well in advance. We help you put a strategic plan into place and show you exactly how these decisions will affect you financially long after the settlement has been reached. Our collaborative experience can help assess potential pitfalls and roadblocks while you are determining how you and your spouse will proceed. Let us advise you during the biggest financial transaction in your life. Please reach out to firstname.lastname@example.org or visit www.collaborativedivorcestrategies.com for more information.