Divorce and Mortgage Planning

Housing seems to be the largest concern, in divorce proceedings, after child custody and support.  The real estate market has been both lucrative and volatile; many families have a small fortune in the "family castle".  An equity buyout can be performed by securing a cash-out refinance transaction.   This tactic helps divorcing couples to avoid selling the property, during a time of extreme stress, into a market that has future appreciation potential.

Spouses who intend to raise the children may have an overwhelming desire to remain in the family residence for a number of reasons:

(1) They do not want to upset the children by moving them from their home and local schools. 

(2) The residing spouse may be traumatized by this sudden lifestyle change and wants to keep some degree of stability in their life. 

(3) Family and friends can be a support group for the residing spouse and relocating from them would be detrimental to the transition to single life.

(4) The departing spouse and residing spouse may have a difference of opinion about the viability of the local real estate market. 

Numbers tend to be pretty straightforward.  Attorneys can calculate, or hire an accountant to calculate, a net worth statement for the couple. 

QUESTIONS that should be considered when dividing real estate assets may include:

(1)  What is a fair market value for the family residence?  This tends to be the most difficult task because appraising property is subjective.  I usually suggest that the couple agree to pick two licensed residential property appraisers to perform a form 1004 appraisal (usually about $400) and average the two values. 

(2) What joint (legal or implied) debts can be disposed or refinanced so that the other spouse is not legally liable?  I've seen many divorce decrees "assign" debts that were joint on a credit report.  The assuming spouse files bankruptcy and has the assumed debt discharged.  The releasing spouse is left with the option to (a) pay the debt  OR (b) follow suit it with a bankruptcy filing.  Banks don't care if your client has a divorce decree.  If your client has co-signed for the debt, they are liable!

(3) How much can the residing spouse afford in monthy debt service?  This can be an art form.  Banks may qualify people for a certain payment that is much higher than the residing spouse's comfort zone.  Often, the residing spouse has a specific time frame for living in the home that coincides with the youngest child's graduation from high school.  Determing a finite holding period can help a mortgage professional to structure an affordable financing option for the residing spouse.

(4) How much cash can be pulled out of the home?  Loan qualification will dictate cash availabilty for an equity buyout.  This is where the "artist" comes in and the "scientist" takes a back seat when structuring and selling the deal to your client and opposing counsel.  Cash shortages, in a buyout, can be resolved by recording an interest accruing, balloon note, after the loan closing, to protect future, unpaid interests.

(5) Is there a monetary value on a speedy and finite resolution?  Emotions can run high in a divorce proceeding.  Spouses ignore separation agreements and suspend existing mortgage payments in order to "force their spouse's hand".  Missed mortgage payments can result in foreclosure (and a loss of a lot of equity) and devastate both parties' ability to obtain future credit.

Far too often divorcing couples fritter away their only asset because they let their emtions get the best of them. You must, as attorneys, represent your clients' interests and aggressively pursue what is best for them.