The biggest asset in a divorce…

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Many of you know, I have served as the CFO for a few legal firms.  One of my longest affiliations was with a family law practice.  (Don’t you just love that euphemism… family law, aka divorce.  One of the most contentious of all law practices.)

And, unless you are part of the 1% (What?  You’re not????), then there are two very big issues that always are front and center in a divorce.  Who gets the kids (and how often) and who gets the house (and it’s mortgage).  I am not going to deal with horrrendous issue of splitting the kids (no, we don’t follow the Solomonian threat of literally splitting them…) today.

But, the house… I will use my own case as an example, so I don’t have to worry about sharing secrets.  The house became a joint asset after we married.  (I had bought it first- but we did pick it out together.  Once my now-ex got the proceeds from her old house, she bought into our marital home.)  My youngest wanted me to keep the house, because it was the only home he knew.  My two daughters had mixed emotions.  My stepkids were also older (actually, each was 2 years old than their corresponding versions of mine) and had less attachment.

But, my ex officially wanted the house, too.   And, she was given the first chance to come up with the financing to buy me out.  (There was a complicating factor in this split- I had used my own money to build out the kitchen [from the size of a closet to a 400 square foot modern beauty], porch, and patio– and, my bank had always refused to add her to the mortgage.  That meant I was entitled to a large substantial premium to my share.  And, a new mortgage would be required.)

That meant a jumbo mortgage.  And, a jumbo mortgage is not dependent upon one’s net worth, but one’s current income.  (This is a real issue when one owns a small business.  Most small business folks try to have a low, reasonable compensation, with larger dividends.  That is perfect to satisfy the IRS [note the term REASONABLE compensation]- but not the mortgage company.)

Nowadays, that means one needs a 43% debt to income ratio.  So, if your income is $ 120K, that means you won’t be able to secure a mortgage if your monthly payments will exceed $ 4300.  (Given the insurance on this house- and the property taxes, that meant the maximum mortgage allowed would have been $575K.  That amount didn’t thrill my ex [whose income was much higher than that].  Instead she opted for a new home, where she could use the cash she would have to pay me get to fix up the house- without any compromises as to my choices. And, the extra cash from me buying our her smaller portion.)

But, for most folks, there’s another complicating factor.  That is- the mortgage company does not include alimony or child support in their calculations.  Because for those payments to be considered “reliable income”, they had to be “long-standing”; i.e., in force for 12 months or so.  And those payments also must continue for at least 36 months into the new mortgage.  (Many support [alimony] programs, nowadays, have fairly short durations, too.)

This is one reason why many houses stay within joint ownership for a year or two.  To let those payments count towards the retaining (ex-)partner to secure the mortgage.   But, it also means that both partners have the mortgage on their credit reports- and that the non-custodial (house) partner may have a harder time getting a mortgage of their own for their new house, since there is one on record.  That, in the mortgage-real estate vernacular,  would be a second home- one that demands a higher mortgage rate.

But, should the breadwinner be the one who needs the financing, there is another catch 22.  And, that is alimony and child support IMMEDIATELY count as reducing one’s income when you have to pay them.  (No one ever accused a banker of being replete with logic.)  And, if the breadwinner is socked with the familial credit card debt to boot, there’s a double whammy!

Let’s also not forget that there needs to be a title transfer (a quit-claim deed).  And, any liens on the property must be cleared away.

As if the divorce situation were already NOT stressful…

It’s why many divorcing couples need attorneys AND financial advisors…

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