Sadly statistics indicate that 52 percent of marriages will end in divorce which begins the process of financial shuffling’ adjusting to a single income and adapting to the routine of a single parent. Any one of these changes could be considered quite an undertaking, but when you combine the three, the typical response is intense emotions, stress and confusion – none of which have any place in serious financial decisions.
A Divorced Mother’s View
As a divorced mother with over 14 years of divorce related mortgage and financial experience, the biggest mistake I see divorcing couples – especially the custodial parents – make, is not getting their finances in order and realistically determining their ability to afford the home before the divorce process begins or at least from the onset of the proceedings. This is step one in ratcheting down the stress where finances are concerned.
If this strategy is followed it affords the parties the option to alleviate joint marital debt and helps establish financial security for the children as well as reducing the financial burdens of the couple so that they can begin what I call the post-divorce recovery phase.
Whether you decide to stay or go each decision comes with its own unique set of adjustments. If you would like to keep the family home, it’s important to be sure you can afford the expense of the mortgage in addition to the other expenses, including maintenance, upkeep, utilities, taxes and insurance. A cash cushion, even if it’s small, is also a must since unexpected expenses are a given and can derail even the most well-prepared budget putting you in a position of having to play catch up at a time when you can least afford it. If you decide to sell’ you must consider where you will live and what financial preparations need to be made for a smooth transition. An additional consideration is equity in the home.
Divorce Home Refinance Options
In a divorce a number of scenarios may be presented to you regarding the division and payment of home equity. One is that the parent retaining the home will have a designated number of years to refinance and pay their former spouse his/her portion of the equity.
A second option is that the parent retaining the home may remain there with the children until they graduate from high school, and at that point the home is either sold with the equity divided or the custodial parent must refinance and pay the former spouse his/her equity. However there is one caveat here: Be mindful of when the value of your real estate will be determined since real estate values have dramatically changed over the last three years. And another option is to refinance the home at the time of the divorce and pay your former spouse at that time. If this is done,the custodial parent owns the home outright and no future financing will be required.
Each of these scenarios plays a different part in how to go about preparing for a refinance. But whichever is the case, it is a necessity to consult with a knowledgeable’ mortgage professional who is highly experienced in divorce related refinance transactions before you begin signing mortgage applications to avoid making mistakes that could be costly and may even prevent you from obtaining financing the financing you need. It should also be noted that as of May 2009, federal lending guidelines changed, prohibiting the use of independent appraisals for all real estate transactions which means that banks and lenders now designate the real estate appraiser from their own databases. Based on this new law, if you need to obtain a value of your home, but are not refinancing, I suggest obtaining a Market Analysis from a licensed realtor which will prevent you from spending around $300.00 unnecessarily.
Divorce is mentally and emotionally draining and unfortunately for many’ it can mean suffering financially as well if you neglect to take the right steps prior to making any final decisions. Therefore, whatever you decide, it is important to do your homework, have a plan ready to implement and extract your emotions from the equation when making your financial decisions.
If you want to retain your home you will need to be financially savvy to your income vs. expenses ratio. Keeping in mind that you are now a single parent and a single homeowner, you need to restructure your finances to keep it simple through the post-divorce transition period. In other words’ your monthly expenses should be proportionate to your income with minimal consumer debt such as credit cards or installment loans.
Start by calculating your usable after tax monthly income by including your weekly pay, Child Support or Alimony (if applicable – either paying or receiving) and any other sources of consistent income such as rental income, annuities, etc. This is the starting point to determining your ability to afford the home with the next step being a consultation with a financing expert. The home mortgage industry has now become extremely volatile and many financially advantageous programs for single parents/homeowners are simply no longer available which can make the difference between being able to stay and being forced to sell.
If you decide to sell, hopefully you and your soon-to-be-former spouse have decided how you will split the equity. The first step, as I mentioned above is to determine the market value of your home. At this point you have two options: List the home with a Realtor or sell it yourself as a For Sale By Owner (FSBO) property. Listing with a Realtor will spare you the time and work of selling for a commission paid to the Realtor’ which can range from 3 to 6 percent, and is deducted from the total equity proceeds. If you sell the home yourself, be prepared for a lot of work since you will be responsible for advertising’ showing the home and fielding the calls. This is time consuming and can easily add to your stress. I recommend consulting with a Real Estate Attorney for the specifics of selling yourself and a tax preparer for information on capital gains and tax implications if applicable.
Another very important and often overlooked aspect of post-divorce financial recovery is your credit rating. Most individuals understandably do not have a sound grasp on credit, how the system works or exactly what factors effect their credit scores. It can be damaging if action is taken like closing accounts’ without the knowledge of how to go about it in a way that will minimize the negative effect on your credit rating. Even though joint marital credit accounts need to be closed it is important to minimize the effect of this activity on your credit scores.
Whether you are refinancing your existing home or will be purchasing a new one, your credit scores and mortgage payment history will be the biggest deciding factor in determining your creditworthiness and what interest rate you will pay. So my advice to my clients is to pay their mortgage on time, every time. The time you take to prepare when you are going into a divorce can greatly minimize the damage of quick impulsive decisions that could prevent you from starting over from a position of financial advantage. It may seem like more stress at a time when you really need less, but the benefits far outweigh the effort.
Lori A. Grover is a Certified Divorce & Family Conflict Mediator, Author and divorce financial strategist and with her Husband Kevin J. Grover is the oOwner of The Divorce Resource Center of Rhode Island in Cranston, RI, USA. You can read this and Lori’s other articles on the web and learn how Mediation can reduce the stress and cost of your divorce at the company’s web site: www.drcri.net
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