Adore it or Checklist it: What to do with the marital house in case of divorce | Bowditch & Dewey

Depending on the size of an existing mortgage, the equity of the marital home often represents a significant part of the property, however illiquid the equity may be. How do the parties to the divorce manage this asset during and after the divorce proceedings?

If neither party is interested in keeping the marital home, the house can be sold, the existing mortgage paid back, and the equity converted into a liquid asset that can be shared between the parties. However, if a party wants to keep the house, other factors need to be considered. For the purposes of this analysis, we will call the party living in the home “Spouse 1” and the person leaving the marital home “Spouse 2”.

IS THERE AN EXISTING MORTGAGE IN THE NAMES OF BOTH PARTIES?

In this case, a simple transfer of ownership is not enough to protect Spouse 2’s interests. That is, Spouse 2’s waiver of their property rights does not nullify their obligations under the mortgage. Any separation agreement must therefore state that Spouse 1 is responsible for paying the mortgage, and it should also contain an appropriate indemnification provision, i.e. if Spouse 1 fails to meet the mortgage obligations, he will defend, indemnify and hold Spouse 2 harmless from any liability that results from it. However, as set out below, even these provisions may not be sufficient.

DOES SPOUSE 2 NEED TO QUALIFY A MORTGAGE FOR A NEW HOME?

Although every situation is different, qualifying for a new home mortgage while a marital home mortgage is still owed can be more difficult. Lenders know that, regardless of the terms of the separation agreement, if Spouse 1 defaults on the marital home mortgage, the lender may settle Spouse 2 in payment, jeopardizing their ability to meet the mortgage obligations on the new home. Accordingly, Spouse 2 may want Spouse 1 to refinance the marital home, repay the existing mortgage, and take out a new mortgage on their behalf only. But…

CAN MARRIAGE 1 QUALIFY FOR A RE-FI IN THE MARITAL HOME?

Lenders often rely on income history to determine eligibility. In the event of a divorce, Spouse 1 can be a parent who is staying at home and is about to return to work, or a parent who is staying at home and is about to receive child support. Since lenders often want several months of consistent income before making a loan decision, the parties may have to anticipate that Spouse 1 will need some time to refinance the home. In these circumstances, for example, the parties may consider setting a deadline by which Spouse 1 must complete the refinancing in order to relieve Spouse 2 of any marital home obligations. If the refinancing is incomplete, the agreement can provide for a sale of the house.

These problems can make even the most amicable divorces difficult. If you are facing them in your divorce, we highly recommend consulting an attorney who can help you weigh your options and navigate to the solution.