Written by Jay Mota, MAFF®, CDFA®CFP®, CQS®, WMCP®, ChFC®

When a couple divorces, it often occurs when one spouse wants to keep the marital home. This could be to stay in a particular school district, avoid disrupting the children’s lifestyle and friends, or for emotional ties to the home. Each case is different, and the reasons behind this decision vary, but regardless of the reason, there are serious issues to consider when deciding if both spouses will remain on title and the mortgage post-divorce. 

Depending on how far you look back, mortgage rates today can be considered high or low. If you talk to someone who mortgaged a property in the 80s, they’ll probably recall financing a property at double-digit percentages. On October 21st, 1981, the average 30-year fixed mortgage rate was at a high of 18.39%. In fact, 18.39% was the highest average for a 30-year fixed mortgage dating as far back as 1971. In the 90’s, the average mortgage rates ranged from 6.73% to 10.67%. For anyone who purchased or refinanced their homes from 2020 to 2022, the average rates went as low as 2.73%. Those who could qualify for a mortgage to purchase or refinance during the 2020 – 2022 years did. However, even if someone didn’t take advantage of the super low rates in 2020 – 2022, the rates have not been at the current average rate of 6.88% since 2001. 

This leads to the current issue of divorce and real estate. When working with clients toward settling their divorce, if the house is being retained by one of the spouses, the challenge is how to do so without having to endure much higher interest rates. It almost seems unfair that the spouse keeping the home is penalized with a higher interest rate, but unfortunately, this is just one of the unfair outcomes of a divorce. 

I often recommend that a clean break is the best way to settle the real estate division. That is to sell the home or for the spouse who will be staying in the home to buy out the other.  I realize that not every divorce is contentious, and not everyone going through a divorce wants to put the other spouse at a disadvantage. I celebrate this; however, the risks of staying on the title and on the mortgage remain. 

When you are no longer living in the home, the real estate becomes an investment. Like any investor seeking to make gains from an investment, the gains they receive are a result of the risks taken with the investment. The more risk, the more potential for gains and the risk of loss. Most investors are risk-averse and are affected more by losses than gains. 

When it comes to divorce, when one spouse is keeping the home, the choices are to buy out the non-occupying spouse or for both parties to remain on the title and mortgage with the non-occupying spouse to be paid out at a later date. When jointly retaining the property, there is more to consider than potential equity in the future. The first risk to staying on the title and mortgage is that real estate values may go down. The values could decrease based on the overall market conditions or could be specific to the area where the home is located. While planning with clients and estimating the long-term growth of real estate, I often use a rate of 2.5% per year. Yes, some years can be more, and some can be less, but I feel 2.5% is a conservative average without a crystal ball. 

For the non-occupying spouse, if you are no longer paying the mortgage despite being financially responsible for the mortgage, the calculation for equity stops once the divorce is final. There may be a shared appreciation that will increase the ultimate payout, but if the occupying spouse is paying 100% of the mortgage, their equity will grow along with their share of the appreciation. The longer this goes on, the lower the percentage of the appreciation will be for the non-occupying spouse. If the non-occupying spouse continues to pay the mortgage, both shares will be equal. 

The question is, for the non-occupying spouse now who has an investment in real estate, are you getting paid for the risks you are taking? We have already discussed the returns based on the real estate market, which are inherent to owning real estate; however, there are additional risks to be considered and should be discussed when making the decision to stay on title and the mortgage. 

The second risk is the risk of not being able to qualify for an additional mortgage. To qualify for a mortgage, you must meet certain criteria, such as credit score, sufficient cash assets, and your debt-to-income (DTI) ratios must be within the lender’s guidelines. The challenge may be your DTI even if you have good credit and sufficient assets to qualify. Although you are not actually paying for the mortgage you kept with your ex-spouse and have sufficient income to pay your current debts along with the new mortgage, the existing mortgage being on your credit may make your DTI ratios higher than the guidelines allow. Essentially, you must make enough income to afford 2 mortgages. 

Each lender has its own DTI limits; FHA sets the limit at 57%. To determine your DTI, you have to add up all the payments on your credit report, including the existing mortgage, then add the new property mortgage and divide the total by your income. Child support and alimony may be counted as income, but this will be up to the lender. In the end, if your total debt, including the new home, is over 57%, chances are you will not qualify for a new home mortgage. When considering staying on the marital home mortgage, you must consider what compensation you would need to receive to take on the risk of not qualifying for a new mortgage while your spouse is still living in the marital home?

The third risk is liability. If you are the owner of the property, you are liable for any damage to another person that happens on your property. An example would be if a housekeeper works in the home and falls down the stairs and then later sues or a contractor who gets injured and later sues. Yes, homeowners insurance will pay for damages, but only up to the limits purchased, and additional insurance, such as an umbrella policy, may cover excess losses, but the dollar amount of damages over the total insurance coverage falls back on the homeowner(s). Other liabilities you could be responsible for are liens or fines levied against the property. 

One may ask about coming off the title to the home to avoid these risks; however, it may be a bad idea not to legally own a property you are still financially responsible for. Depending on what state you live in, there are options on how the property can be titled. Understanding how your property was titled while married and how it should be titled post-divorce is important. A real estate attorney would be your best resource for his decision. 

The fourth risk is the default risk. Think of the interest you pay a creditor. The interest rate varies depending on multiple factors, but the default risk you pose to the creditor is the biggest. If you have less than perfect credit, you are considered a higher risk, and therefore, the lender needs to be paid for the higher risk they take by lending you money. The opposite is true if you have excellent credit, there is less concern of default therefore, you will qualify for preferred lower rates.

When you remain on the mortgage of a property and are not making the payments but relying on your ex-spouse to make timely payments, there is a risk they may default. A default can be completely innocent, such as not being able to work due to injury or illness, or it could be done irresponsibly. Nonetheless, if the mortgage is not paid in a timely manner, the non-occupying spouse will still suffer and either have to pay for the mortgage or have their credit ruined by late or missed payments. Therefore, this is a risk that a non-occupying spouse should be rewarded for when considering staying on the mortgage post-divorce. 

These risks must be considered when deciding to stay listed as the property owner and be financially responsible for the mortgage. If you decide to remain on the title and mortgage to convenience your soon-to-be ex-spouse, you will have to decide what you need to be paid to take on these additional risks. Divorce is seldom cheap or quick, and asset division is almost always final when you divorce. If you have lingering issues with your divorce once it is finalized, there is a chance you will be facing a similar process all over again. This is why I recommend a clean break. I think it is safe to say no one wants to divorce the same person for a second time, especially because of issues that could have been resolved the first time.