Divorces are stressful. Setting aside the emotional challenges, you also have to make tough financial decisions. Should you refinance the home that you own together, or buy out your partner? The choices that you make before and during your divorce proceedings can impact your ability to borrow money and support yourself for years after.
Whether your divorce is contentious or amicable, there are several things that you should consider when you end a marriage.
Dividing Assets and Debts
Every couple must divide marital assets and debts before a judge will grant a divorce. Assets are items with an equivalent cash value, and debts are all outstanding financial obligations (credit cards, mortgage, loans, etc.).
Couples can divide their assets in any way that suits them, or they can seek the court’s assistance if the split is contentious. There are two primary ways that courts divide property:
Communal Property States
In a communal property state, assets and debts are split equally between each party. Any property that belongs to just one spouse is awarded by the court separately. The two types of property are:
- Marital property – things earned or acquired during the marriage, including wages, vehicles, etc.
- Separate property – things that belong to just one spouse including inheritances, gifts received before or during the marriage, property agreed to in writing as separate, etc.
There are only a handful of communal property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Equitable Distribution States
In an equitable distribution state, the court divides the property fairly among both spouses. The division is often 50/50, but sometimes one party is awarded more than the other. If the couple agrees to a division on their own, the court will usually grant it. However, the court can assist in dividing part or all of the couple's assets and debts.
Just like in communal property states, equitable distribution states divide the property into marital and separate.
How Does the Court Divide Assets and Debts?
Courts look at several factors when deciding how to divide marital property in an equitable distribution state. A judge may consider:
- The finances and earning power of each spouse.
- The value of each spouse’s separate property.
- The amount that each spouse contributed to purchasing the marital property.
- The ages, health, and future financial prospects of each spouse.
- Premarital or prenuptial agreements.
- Spousal alimony obligations.
In the vast majority of proceedings, couples divide trivial items like clothing without conflict. However, it’s smart to consider all of the assets and debts that you and your spouse have and how you will divide them. If possible, discuss how you will separate your items and accounts before appearing in court.
Use this helpful checklist to begin listing the property that you and your spouse need to divide:
- Primary home
- Vacation or secondary properties
- Business and rental properties
- Home furnishings
- Checking and savings accounts
- Retirement funds
- Certificates of deposit (CDs)
- Life insurance policies
Should You Refinance Your Mortgage?
Buying a home is a significant investment. Many couples relied upon two incomes and credit scores to secure a home loan. So, what happens to your home when you divorce? Usually, a court will not award the home to one spouse without a stipulation that the other party is removed from the mortgage.
In some cases, one spouse will “buy out” the other, paying them the cash value of his or her half of the home’s value. The party who retains ownership of the home can file a quitclaim deed to remove the other party from the house’s deed.
Sometimes, the spouse who is keeping the home will need to refinance to afford to buy out the other spouse. It’s essential that you first pre-qualify for refinancing before you put terms for refinancing in the divorce decree.
In many divorces, neither party can afford to buy out the other. Other times, both parties want to keep the house. In both cases, the court can order the couple to sell the home within a specific amount of time. The couple would then split the proceeds of the sale.
In an amicable divorce, you and your spouse might want to refinance the mortgage to make it easier for one party to stay in the house. It’s common for one spouse to remain in the family home to make the divorce easier on the couple’s children. Refinancing your home can save you money in the long run, but it’s complicated to do during a divorce.
The easiest time to refinance your mortgage is before you file for divorce. With two incomes and two credit histories, your chances of getting a favorable interest rate are much better. After the divorce is final, the spouse who keeps the house can file a quitclaim deed to release the other spouse from the mortgage.
Unfortunately, not all separations are amicable enough to undergo the refinancing process before filing for divorce.
If you’ve already filed for divorce, you’ll have to wait until you have documentation from a court about how much money one party will pay the other (if any). Lenders won’t refinance a loan for someone whose income is uncertain. Sometimes, you can get agreement documentation before the divorce is final. However, it usually takes several months.
If you’re relying upon alimony and child support for your income, you may need to wait six months to a year before refinancing. Most lenders want to see consistent, on-time alimony and child support payments for at least six months to a year to prove that you reliably received that money.
What Should You Do?
Each situation is unique, so if you have questions about your refinancing options before, during, or after your divorce, get in touch with Lincoln Lending today.