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Staying in the family home after divorce: the role of refinancing

"Home is where the heart is," or at least so goes one of the gauzy romantic fictions that sometimes become undone in an unpleasant marriage. Indeed, for couples who seek to get divorced but are underwater on their mortgage, it could be said that in many ways their house at the heart of their financial problems.

For years, dividing the marital home was not particularly difficult for most couples who wished to get divorced. After all, prior to 2007, it was often merely a matter of deciding who would keep the house and who would take out a mortgage to get another.

But then the real estate crisis and the Great Recession came as a double-whammy body-blow to many married couples. Jobs became harder to come by, housing values sank and many people were left owing more on their mortgages than their houses were worth. This includes many people who wanted to divide up assets and debts in a divorce property settlement.

With well-paying jobs harder to find and underwriting standards for home mortgages made stricter, it is now often not so easy for a spouse who moves out of the house to buy another one anytime soon. 

But that is only part of the problem. If one spouse is staying in the family home, it will probably be necessary to refinance the mortgage so that it is in that spouse's name alone.

Refinancing may pose challenges, however, if the bank that holds the mortgage has questions about the finances of the spouse who is seeking to refinance. Such questions can arise, for example, when the spouse who is staying in the house will be relying on spousal support payments to make the mortgage.

This is not to say that relying on support will necessarily be a deal-breaker in a refinancing transaction. But it may be necessary to create a reserve fund or execute a document showing the source of income. 

Source: Post-Gazette, "Divorcing couples face sea of potential issues when dividing financial assets," Tim Grant, September 2, 2013

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