EP 126: Marital Home (Part 5 of 5) — How to Handle an Underwater Home

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EP 119: Marital Home (Part 1 of 4) — Can You Afford to Keep Your Home?

This is the first episode of a four-part series about what happens to the marital home during a divorce.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed | YouTube or click on the episode player above.

Like everything else during a divorce, this issue will require you to think carefully and decide what makes the most financial sense for your situation. Financial decisions that you make during your divorce can affect you for years to come (including your decisions about what to do with the marital home).

The marital home can often be an emotional topic. You may have a lot of good memories about it, and your kids may have been raised there. Many of my clients want to keep their house, even if they do not understand all the financial implications of doing so. You should consider the full financial picture before deciding what you want to do with the house.

When going through a divorce, you have three options regarding your house:

  1. Keep the house (and the mortgage).
  2. Transfer the house and the mortgage to yourself or your spouse.
  3. Sell the house.

This episode focuses on the financial issues you should consider if you are thinking about keeping the home. There are a lot of expenses that come with this option (beyond just the mortgage), and it is important to consider all those expenses when determining if you can afford to keep the home. Sometimes, keeping the home turns out to be a mistake, and it can even result in bankruptcy.

Here are five key expenses tied to keeping your home, which you need to factor in when deciding about keeping your home: 

1) Mortgage

Most people have a fixed-rate mortgage, so your mortgage payment will not change. If you have a floating-rate mortgage, you need to know what it could become in the future if interest rates go up. Some people may have a balloon payment near the end of your mortgage. In that case, it is important to have those figures when deciding to stay in the home. 

2) Property taxes

These taxes may be included in your mortgage payment. They can change, depending on where you live. Your county may reassess your property and increase your taxes. You should know what those rates could potentially be, and how they would impact you.

3) Insurance

It may also be included in your mortgage payment. If not, you will need to know what that ongoing cost is.

4) Repairs and maintenance

Get a home inspection to find out which repairs your house needs. Be sure to factor in regular maintenance costs and unexpected repairs (for example, a sudden plumbing problem). You should have included estimates for household maintenance in your financial affidavit, but if not, do so now. A rough estimate for repairs and maintenance is 1% of the value of the home each year.

 5) Improvements

Are you going to need to replace major appliances? Do you have rooms that need renovations, or are you planning on making other additions to the house? These expenses need to be factored into your budget.

Can you afford to keep your house, given these expenses? If you can, you will have to decide whether or not it is worth it. What are you sacrificing to keep your home? Be sure to listen to the next three episodes in this series, and seriously consider whether keeping your home is the best decision for you in the long term.

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

EP 121: Marital Home (Part 2 of 4) — Complications When One Spouse Keeps the House

This episode is the second part of a four-part series on handling the home during divorce.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed | YouTube or click on the episode player above.

Often, people going through a divorce have a strong emotional attachment to their home. The first episode will help you objectively assess the financial reality of your situation.

This episode focuses on what to do when one spouse is going to keep the marital home, whether it is you or your spouse. It will help ensure that you are educated and informed about your financial options.

If you or your spouse are going to keep the marital home, you will need the know the answers to these questions:

1) Who owns the home?

Sometimes, a client thinks that they own the home, but find out that their name is not actually on the title. It is important to make sure that you know whose name is on this form. The title is a legal document, which clarifies whether or not you own the home or part of the home. If your name is not on the title, that will be a big factor in the negotiations about your assets. There is another document called a deed, which is used to transfer the title from one person to another.

There is an added complication: marital property versus separate property. You can have a situation in which only one person’s name is on the title, but the house is considered 100% marital property. In that case, each spouse owns 50% of the house. You could also have a situation in which you only own 30% because of the way the house has appreciated over time. You will need to know your state’s laws about marital property (in terms of the timing of the home purchase, and whether it increased in value during the marriage).

2) Whose name is on the mortgage?

If you and your spouse jointly own the home and the mortgage, there will only be one way to remove one person’s name from the mortgage: paying it off. Both you and your spouse have a contract with your lender, and the only way to end that contract is by selling or refinancing it.

If your spouse is keeping the house, they will have to refinance it in their name. This situation can add complications, because the bank will examine their income and their credit history and decide if they can afford the mortgage as a single person. If your spouse does not qualify, your name will still be on the mortgage. You will not want to give up ownership of the home until it is certain that your spouse is refinancing.

3) How do you remove a spouse from the ownership of the home?

There are two options: a quit claim deed or an interspousal transfer deed. It is important not to give up ownership of the house if your name is on the mortgage.

There are a lot of considerations when deciding whether one spouse keeps the home during a divorce. There are benefits and disadvantages to everything in divorce, so you need to figure out what makes sense for your situation.

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

EP 123: Marital Home (Part 3 of 4) — Selling the Home Can Cost More than You Expect

This episode continues the four-part series on the marital home during divorce.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed | YouTube or click on the episode player above.

The first two episodes helped you assess whether you can afford to keep your home, and gave you some points to consider if one spouse is keeping the home.

What are all the costs if you choose to sell the house?

Selling a home comes with mixed emotions. A lot of people feel like they cannot bear to sell their house because they are so attached to it. However, sometimes selling the house is the best thing you can do. Your next house may not be as nice, but many people feel a sense of relief after they sell it. Moving out of the marital home gives them a clean slate to start their new life. It can help you move on, both emotionally and financially.

When deciding to sell your home, there is one main question: How much will you get out of the sale? This question might seem simple, but it is actually quite complex. It is not just asking what the value of your home is, but what you will get to keep after all the expenses of selling a home. In the next episode, you will learn about appraisals and how to determine the value of your home.

There are three main expenses associated with selling a home:

1) Selling costs.

Assuming you use a real estate broker, you will pay them a commission of 5-6% of your home’s selling price. However, there are other selling costs, including escrow costs, recording costs on the sale, title insurance, and repairs (to prepare your house for sale).

You may have housing-overlap expenses. They include paying for a new home or apartment, but still paying the mortgage on the marital home. These selling costs can add up. Depending on where you live, your total selling costs could be 10% of the value of the house.

2) Paying off the mortgage.

When you sell your house, your mortgage company will immediately receive whatever amount is left on your mortgage. If you have a home equity line of credit, you will be paying that off as well. Depending on how much is left in your mortgage, it may make a significant dent in the amount you will receive from selling the house.

If you happen to be in a situation in which the value of your home is less than the amount of the mortgage and any home equity loan, then you will be short-selling your house. A short sale is a very complicated process, which is beyond the scope of this episode. If you are in this position, find out how it will affect you.

3) Paying taxes.

You may also have to pay capital-gains taxes on your house. What is a capital gain? Put simply, it is the profit that you are making from the sale of your house. If you bought your house for $300,000, and you sell it for $600,000, the difference of $300,000 is considered a capital gain. You will have to pay taxes on a portion of that profit. Capital gains are discussed in more detail in Episodes 16 and 94.

In this case, the timing of the sale is very important. You are allowed an exemption on $500,000 of capital gains if you are married at the time of the sale. However, if you are divorced when the sale happens, then you are only allowed to exempt $250,000 of the profit that you made.

So in the example above, you would pay zero capital gains tax if the house is sold while you are still legally married, but you would pay a 20% tax on $50,000 if you sell it while divorced. If you had an even larger profit on your house, selling while still married will save you even more money

The math involved with these costs is a bit difficult to understand, so here is an example. Let us say you sold your house for $1,000,000, and you originally paid $400,000. You still have $200,000 left on the mortgage. You will pay 10% in selling costs, which is $100,000. You will pay off the $200,000 mortgage. Then you will need to calculate your capital gains tax.

If you are still legally married at the time of the sale, you will only need to pay tax on $100,000, because the profit was $600,000 and the exemption will be $500,000. Since capital gains tax is 20%, you will pay $20,000 in tax.

However, if you are legally divorced at the time of the sale, you will pay tax on $350,000. Your exemption is only $250,000, so you are paying $70,000 in tax

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This example shows that the actual money that you receive from selling your house will be quite a bit less than the value of the home. In this example, you will lose up to 37% of the value because of selling costs, taxes, and the mortgage.

Here is the reason this lesser amount is important: during divorce negotiations, a million-dollar home cannot be treated the same as a million dollars in a bank account or investment account. If your attorney is not doing this math for you, then you will need a specialist to help ensure that you do not make costly mistakes.

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

EP 125: Marital Home (Part 4 of 4) — Determining the True Value of Your Home

This episode is the final part in our four-part series on the marital home.  This episode discusses determining the value of your home.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed | YouTube or click on the episode player above.

It is important to have an accurate appraisal of your home, so that you can negotiate what will happen to the home after your divorce. Many people think they can rely on websites like Zillow, Redfin, or Trulia to estimate their home’s value, but they could be the worst options for you. As an example, Spencer Rascoff (the CEO of Zillow) recently sold his home for 40% less than estimated on Zillow. You do not want to rely on an inaccurate tool.

There are three reasons online appraisals are nearly useless:

1)  Online home appraisals ignore interior conditions.

Real estate websites use statistics to calculate your home’s value, and are not able to factor in the condition of the interior. If you have a 20-year-old home, a website like Zillow will assume that your kitchen has not been updated in 20 years. So if you have invested money into renovations, they will not be accounted for. The same house with two different interiors can have vastly different market values.

2) Online home appraisals have a high margin of error.

These websites often have inaccurate data, such as the wrong square footage or number of bedrooms. In major cities, more than half of homes sell for an amount that is off by more than 5% from the Zillow estimate.

3) Online home appraisals do not properly account for your neighborhood.

Home valuation is often based on the selling price of comparable houses in your neighborhood. Websites like Zillow frequently get this price wrong by choosing homes that are not comparable.

For example, your home may be in an area where there are gated communities near ungated communities. The home valuations are going to be vastly different between those two communities, but a website will not be able to tell the difference.

Hire a licensed real estate appraiser.

You will need to hire a certified real estate appraiser. There is more information on appraisals in Episode 30 of this show (which will not be repeated here), so be sure to listen to that. Do not rely on an appraisal that is more than six months old.

Also, be sure to use a certified real estate appraiser (not a real estate agent). Real estate agents’ valuations are often inflated, and they will not hold up in court. Ask your attorney which type of appraisal is best for you.

There are three things you should do when choosing an appraiser:

1) Choose an appraiser familiar with your area. Make sure the appraiser knows your immediate market and neighborhood. In large cities, there is a vast difference between neighborhoods, so you need someone who is familiar with your local area.

2) Do your own research. Look at houses in your neighborhood that are like yours (including the number of bedrooms and similar features), and see what they sold for. Do not look at listing prices, because they more inflated that the actual sales price data.

3) Be present when the appraiser comes to your house. You can point out features of your home that the appraiser might not notice. You may have had recent renovations or some benefit that might not be immediately obvious. The benefits of your location are also good to point out (such as being near a good school). Pointing these things out will help your appraiser get as accurate a value as possible.

Conclusion

It is best to get a neutral appraiser that you and your spouse agree upon. If you and your spouse each choose a different appraiser, it can lead to a lot of expensive fighting when the numbers do not match. Sometimes, attorneys will manipulate these situations to pad their bill. It is not worth fighting over the value of your home, so choosing a single appraiser is the best way to go.

Appraisals are not an exact science. The appraiser may give you a range of values for your home.

By choosing a certified real estate appraiser, you can have confidence that you can use that figure if you need to testify before a judge. The figure might not be perfect, and the house might sell for a different number. But if the appraised value is fairly accurate, you can use it in negotiations. You can end up making expensive mistakes if you fail to get an accurate value of your home because you skipped this step.

EP 126: Marital Home (Part 5 of 5) — How to Handle an Underwater Home

Your marital home is one of the largest assets that will need to be considered during a divorce. However, what do you do if your current mortgage is underwater? When you and your spouse owe more than the house is worth, it can alter the options that are available to you. For your settlement negotiations, you must make sure that you understand the implications of owing more than your house is worth.

Want to listen to this episode on your mobile device? Just use one of the following links: iTunes | Google Play Music | RSS Feed | YouTube or click on the episode player above.

How severe is the situation?

The first thing that you need to assess is just how far underwater your current mortgage is. One of the best ways to determine the current value of the home is to hire an appraiser. In order to give you a realistic picture of the market value of your home, a good appraiser should be familiar with the area where your home is located. This appraisal will give you a quick idea of the overall deficit on your mortgage.

However, you still need to factor in other costs that could enlarge your deficit even further. If you decide to sell your underwater home, you may still need to factor in realtors’ selling fees and closing costs. Search through records to determine if there are any liens placed against your property, which will also need to be addressed prior to selling the home. To determine the overall deficit on your current mortgage, all of these additional costs must be factored in.

Once you understand just how far underwater your mortgage is, you stand a much better chance of selecting the correct options moving forward (for you and your spouse). As such, these three options should be on the table when your current mortgage has a large deficit:

Option 1: Keep the house.

This option is highly dependent on whether or not you can afford to keep the house as a single person. With the loss of one income, many people find that it is financially unrealistic to remain in the marital home. The mortgage payments should not leave you financially strapped on a monthly basis. If they do, then you will need to consider another option.

Regarding keeping the house, several factors may play into your divorce settlement. Some couples choose to remain in the marital home until a set date, such as when their children graduate from high school. In situations like these, you can opt to set the property division for a specified date in the future. In the meantime, you can work towards paying down the mortgage.

Alternatively, negative equity may factor into your divorce settlement. In other words, a spouse who opts to keep the marital home may be granted a bigger portion of a different asset to make up for the deficit. Factoring negative equity into the settlement is a way to maintain the marital home for yourself and your children, while still securing a stable financial future for yourself.

Option 2: Opt for a short sale.

If you know that you can no longer afford the home with just a single source of income, it may be time to consider a short sale as an alternative to foreclosure. This option allows you to pay off some of your current mortgage, and potentially repay the remainder of the debt later.

In order to consider short-selling your house, you must first receive approval from your lender. Since a divorce would mean the loss of one income toward your mortgage payment, you may qualify for approval.

Depending on your state laws, a short sale may mean that many of your debts will be cancelled. Other states allow for recourse loans, which enable lenders to take homeowners with short sales to court; therefore, they can make payment arrangements for the remaining debt. Solutions for the latter could end in situations such as wage garnishment. If you happen to have a recourse loan, the remaining debt could be divided between spouses during mediation or litigation.

Bear in mind that a short sale can create significant damage to your credit score. Slightly greater than a foreclosure, a short sale that puts large dents in your credit score will make it more difficult for you to secure funding in the future. Receiving approval for an auto loan or new mortgage may be a challenge. As a result of your lowered credit score, you may even face higher rates or less favorable terms.

Many homeowners are unaware that there could also be serious tax implications associated with a short sale. If you live in a state where your debt is cancelled as the result of a completed short sale, the IRS could be more likely to consider that debt cancellation as a form of income for the year. This additional income often translates into thousands of dollars, so it may result in exorbitant, unexpected tax bills at the end of the year.

Option 3: Face a foreclosure.

Perhaps the bank will not allow a short sale, and you can no longer afford the home. If so, you may be forced into foreclosure. This situation can severely impact your credit for the next seven years (or longer, depending on how long it takes to resolve the foreclosure). Therefore, when it comes to resolving the issue of an underwater mortgage on your marital home, this option is the last resort.

Understand the Deficit before You Decide

Before you can make any educated decisions regarding the status of your marital home, you need to consider the overall deficit that you face during your current mortgage. If you know where you stand regarding your finances, you can weigh all of the options in the wisest manner possible.

Divorce is an emotional process, and discussing the loss of your marital home can significantly contribute to that feeling. If you will separate your emotions from the situation at hand, you and your spouse can focus on what is best for both of your financial futures.

 

Shawn Leamon, MBA, CDFA is the host of the “Divorce and Your Money Show” and Managing Partner of LaGrande Global, with offices in Dallas, New York and Hanover, New Hampshire.

Thank you for listening to the Divorce and Your Money Show. Visit us at www.divorceandyourmoney.com for 1-on-1 coaching. If you enjoyed the show, please take a moment to leave a review on iTunes, as it will help other people discover this free advice.

Shawn Leamon, MBA, CDFA

Dallas, Texas

Shawn C. H. Leamon is Managing Partner of LaGrande Global, a firm that helps successful families manage large financial transitions like divorce, inheritance and selling a business.

He earned his Bachelor of Arts from Dartmouth College, double majoring in Economics and Philosophy, and his Masters in Business Administration at Spain’s IE Business School.

Before founding LaGrande Global, Shawn helped manage $1.1 billion in client assets at Bernstein Global Wealth Management. He also worked as a credit research analyst at J.P. Morgan. He is a Certified Divorce Financial Analyst, and he has been an advisor to numerous high-stakes divorce cases.

Shawn is the author of two well-received finance books: Managing Private Wealth: Principles, and Divorce and Your Money: The No-Nonsense Guide, both published in 2016.

In his spare time, Shawn is an ultra-endurance athlete and has competed in events as long as 24 hours. He is an Eagle Scout and a member of the Alumni Board of Greenhill School.