Financial Planning in Divorce – The Family Home

“This being human is a guest house
every morning is a new arrival.

A joy, a depression, a meanness,
some momentary awareness comes
as an unexpected visitor.

Welcome and entertain them all!
Even if they’re a crowd of sorrows,
who violently sweep your house
empty of its furniture,
still, treat each guest honorably.
He maybe clearing you out
for some new delight.

The dark thought, the shame, the malice,
meet them at the door laughing,
and invite them in.

Be grateful for whoever comes,
because each has been sent
as a guide from beyond.”

Rumi,The Guest House,” translated by Coleman Barks.

I love Rumi’s poem The Guest House because it is the plan for wholehearted living.  Welcome all emotions no matter how painful.  Invite them in. Be grateful for whoever comes.  Why?  Because each emotion you experience “may be clearing you out for some new delight.”

Divorce is no different.  It is not something any of us wish to experience.  For many, it is something they are forced into.  But like with any challenging experience, those who thrive meet the experience at the door and invite all experiences—the good and the bad—to enter.  How does this apply to divorce?  Well, one way to accomplish this is to make sure you engage in some divorce financial planning.  You do not plan a family trip without having some idea of where you want to go and how you are going to get there; divorce is quite similar.  It always surprises me how often couples spend months or years planning every detail of their wedding but expect a divorce to be finalized within weeks without any real financial planning.

Over the next few weeks, Divorce Reimagined will provide guidance on some of the key elements that should be considered when planning for divorce beginning with the family home.

THE FAMILY HOME

There is the adage that “home is where your heart is.”  This is never more present than when deciding what to do with the family home in divorce.  Whether to sell or keep the family home is one of the most challenging and important decisions to make.  Unlike other assets, not only is the family home the most valuable asset but it is attached to significant memories and experiences.  If you have children, you may want to keep the home to minimize disruption to their lives.  However, making the decision to keep the home can create real financial challenges and significantly impact the future financial success of each spouse.

When determining whether to keep the family home, the following questions need to be addressed:

(1) how much equity is in the home; (2) how will the equity be divided; (3) who should remain in the home; (4) how will the spouse who is moving out get paid his or her equity in the home; (5) when will that equity be paid; and (6) if the mortgage on the home is in both names, or in the name of the spouse moving out, when can the mortgage be refinanced to remove that spouse’s name?

 

Equity in the Home

The equity in the home is calculated based on the fair market value of the home.  Determining the fair market value of the home can be determined in several ways.  Sometimes the property tax assessed value is used but historically, that value is significantly less than the fair market value.  The most accurate way to determine value is to have an independent appraisal done on the home.  Some individuals use the appraisal performed as part of a refinance, but the refinance appraisal often comes back at a lower value than an independently appraised value.


Dividing the Equity

Under Utah law, an asset acquired during the marriage is considered a marital asset with each spouse entitled to 50% of the value.   Assets that are brought into the marriage are considered the separate property of the spouse who brought the asset into the marriage unless it has been commingled with marital assets.  For example, one spouse may have owned the family home prior to the marriage, or one spouse may have used the proceeds from the sale of the home he or she owned prior to the marriage toward the down payment of the family home.  If income earned during the marriage is used to pay the mortgage on the family home, then the home brought into the marriage may be considered commingled with marital estate.  Consulting an attorney to figure out an equitable division of the equity in the home will be an important step in your divorce financial planning.


Refinancing the Mortgage

Determining whether one party can refinance the home into his or her name is another important aspect of your divorce financial planning.  Once a petition for divorce is filed, it is extremely difficult to refinance a mortgage until the divorce is finalized.  You may want to consider refinancing the home before either spouse files for divorce.  If the mortgage is held in both spouses’ names and cannot be refinanced into one spouse’s name, it can financially impair the spouse moving out from purchasing his or her own separate home.  A lack of income and earning capacity is extremely difficult when refinancing a higher value property.  Questions that should be answered include: (1) does the spouse remaining in the home have sufficient credit to refinance the mortgage in his or her name; (2) will one spouse need to buy out the other spouse’s share of the equity, (3) if so, how quickly will the buyout need to happen; and (4) can the spouse keeping the home qualify for a mortgage in an amount sufficient to buy out the other spouse.


Selling the Home

Over the past year, the housing market in Utah has become extremely crazy with low inventory and home prices appreciating up to 30% in the past twelve months.  When selling a home, it will be important for you to research where you plan to move and what is available to purchase.

Whether to sell or keep the family home is not an easy decision.  It can be quite overwhelming.  However, inadequate planning can significantly impact your future financial success.  You will want to create a comprehensive plan based on practical advice.  Finding the right advisors to help you navigate this process will help you gain the confidence to make the decisions that put you on the right path.

For more information, please contact Diana Telfer or the other family law professionals at Clyde Snow & Sessions at (801)322-2516.