How to Avoid Costly Housing Mistakes During Divorce
Divorce is one of the toughest emotional and financial situations you can ever go through, and one of the major decisions you must make during these tumultuous times is what to do about the house.
During a time of such heavy emotional turmoil, you need someone to tell it to you straight and give you some straight-forward, specific answers to your most pressing questions. This is a critical set of decisions you must make, so once you know how the divorce will affect your home and taxes, you be much better prepared to take action.
The first decision you’re going to have to consider is whether to continue living inside the house or remove yourself from the situation and seek refuge elsewhere. You have to determine whether staying in the house will bring you comfort and emotional security, or bring up a bunch of unpleasant memories you’d rather not think about. Do you want to minimize change and stay where you are, or sell your home and move someplace new that offers a fresh start?
Only you can answer these questions, and I’ve created this mini-guide to offer you some advice on how to best handle the situation and bring you the quickest peace of mind. Here are some things to consider about your new circumstances:
- What monthly payment can you now afford?
- Can you maintain your current house on your new budget?
- Is refinancing possible so that you can afford it?
- Or is it better to sell and buy something new?
As you can clearly see, these are some major considerations, and this report is to help inform you and ask the right questions so that you can make the best decision that’s right for your situation.
4 Basic Options When Facing Divorce
When facing divorce, there are essentially four basic options that you have available to you:
- Sell the house now and divide the proceeds
- Buy out your spouse
- Have your spouse buy you out
- Retain your ownership
Now let’s go over each option in detail so that you can understand the financial implications of each scenario:
Option #1) Sell the House Now and Divide the Proceeds
Should you go with this option, the most important things is that you do everything possible to maximize the home’s final selling price. I have other articles and guides available here on this site that will help you accomplish this and avoid all the common mistakes that other homeowner’s make.
Depending on the divorce settlement, the split of the proceeds may not be an equal 50/50 due to circumstances like the source of the original down payments, legislative property laws in the area, etc. Before you go through with this option, make sure you understand what your net proceeds will be after settlement. Seeking the advice of licensed divorce attorney is highly advised.
Option #2) Buy Out Your Spouse
If you intend to keep the house yourself, you’ll need to determine how you’ll be able to meet the monthly financial obligations on your sole income. Make sure you THOROUGHLY go through all your expenses and income sources during this step so that you don’t end up making a mistake and only lose the home to foreclosure at a later date.
The biggest challenges with this option are that if you used both you and your spouse’s incomes to qualify for the original loan, it may be difficult to refinance the property with your sole income now that you’ll be getting divorced.
The other challenge is coming up with the money to buy your spouse out of the loan. While payment plans may be an option, things can get tricky with all the emotional turmoil and you’ll want to be sure you don’t end up in court later arguing over how much has been paid and what was originally promised.
Option #3) Have Your Spouse Buy You Out
This option is a good alternative to selling the home that allows you to start over again someplace new with some money in your pocket to boot. However, beware this option if the divorce is highly emotionally charged and not amicable, and you may not get what you were originally promised.
Also, be aware that if your spouse doesn’t take the proper steps to refinance the loan in their own name, the lender will still consider you “on the hook” for the loan should your spouse default at a later date.
Further, this might make qualifying for a new loan in the future very difficult for you if your decide to purchase a new home, as the lender will consider you heavily in debt for the old home even though you don’t own it or even live there. So once again, seek the advice of an attorney and make sure the post-divorce financial obligations are handled properly by all parties.
Option #4) Retain Joint Ownership
Don’t feel like you need to be rushed to make a decision about the home right away. Sometimes it’s better to go through with all the divorce filings first and then make the decision about the home afterwards.
But make sure you keep a close-eye on your tax considerations as they may change from the time of the divorce to the time of the sale, and maybe unfavorably. Make sure you understand the financial obligations thoroughly before delaying the sale of the home.
When You Decide to Sell:
If you and your spouse make the decision to sell your home, it’s extremely important that you get the help of an experienced and knowledge real estate professional so that you can maximize the return from the sale of your home.
While there may be some irreconcilable differences between the two of you, you should both attend all important meetings together and understand that once you sign the contract listing agreement, you are both active in the ultimate negotiation process for your home and should do your best to work as a team once last time so you can both benefit from a smoother transaction.
When You Decide to Buy Your Next Home:
Once you’ve received the proceeds from the sale of your old home and taking some time to fully comprehend your budget and financing options for a new home, your realtor can help you find the perfect home for you to start a new life in.
Now that your situation has changed, make sure you only get a home that meets your needs and don’t overbuy more home than you need. Talk over these requirements with your agent so that they can focus on only looking for homes that match your needs and new home-buying criteria.