You finally have your dream home, but not your dream marriage; and getting a divorce could mean losing it. What happens with your mortgage during a divorce? Can you keep your home? Do you split the costs? Or should you sell?
Here is everything you need to know about getting a divorce and your mortgage:
Selling your home
If you do decide to sell your home, profits will be split between couples. If you sell your property, expect to lose between 7% and 10% of the home’s actual value, due to any repairs that you may have to make, and realtor fees. Therefore it’s important to work out your equity. You would have to take all those extra fees and the amount you still owe on your bond and subtract it from the sales price. Whatever is left will then be split between you and your partner; although you may also choose to allocate unequal shares.
Refinancing your mortgage
Another option is refinancing your mortgage in your name. However, if you do this, you must rely on your own income and credit score only. If that is insufficient to qualify, you can ask someone to be a co-signer — the only problem is, that if you fail to pay for your loan, the co-signer, is responsible for the loan. If you will receive alimony, you could also use that money to refinance your loan, as long as you’ll be receiving it for at least three years. If possible, try to convince your spouse to transfer the entire property into your name. If they refuse to do so, they’ll still own a portion of the property. However, you can have a quitclaim deed drawn up to remove their name from the deed.
Assuming the original loan
Your mortgage promissory note will tell you whether you can assume your loan or not. If your loan is assumable, this is an excellent option if your existing mortgage has a great interest rate, since assumption fees are usually less than the cost of refinancing your home. Assuming a loan will also require full documentation of your income and other important documents. A drawback to loan assumptions is that they generally take longer than a refinancing; typically between three and six months. Even then, the lender might refuse to grant you a loan assumption.
There are tax implications when it comes to your mortgage. If you decide to sell your home or buy out your spouse’s shares, you’ll have to pay capital gains tax. If you and your spouse sell your home, you can exclude the first $250 000 of gain from your taxable income. This applies though, only to the primary marital residence that you lived in for at least two years prior to the sale of your home. However, holiday homes and investment properties do not fall under this rule. Another tax rule that comes into play is the Tax Cuts and Jobs Acts that took effect in 2019; this act states that a spouse who owns a higher income and who pays alimony will lose a long-standing alimony deduction. The higher-earning spouse also has to pay taxes on it — on the other hand, the spouse receiving alimony, does not.
Renting your property
Renting your property often makes sense in a declining market. You can then use the rental income to pay off your mortgage. And if your property has already been paid off, then you can split the rental income between you and your spouse.
Whatever you decide, make sure you do your research. Speak to your realtor; they’ll be able to tell you how much you could sell your home for and what needs to be fixed, in order to receive the highest price. Speak to your attorney as well, your financial advisor and your lender. They’ll be able to offer you the best advice.
Divorce can be hard emotionally, as well as financially. But if you do your research and have an awesome team of advisors, you can reduce your divorce costs and come out triumphant.
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