TWO SIDES OF THE COIN
Two Sides of the Coin is a series of articles written by Ian Steinberg, a matrimonial and family law attorney, in conjunction with an array of other professionals from different industries. The series provides insights into issues from the perspective of each party to a divorce. Each article provides readers with practice tips that are helpful when navigating through the divorce process.
Qualifying For The Marital Home
By Ian Steinberg, Esq. and Scott Nadler
In its most simplistic terms, when two people are getting divorced they have decided to no longer act as a couple. The divorce process, therefore, requires the uncoupling of these two people who have previously been operating as a singular unit. One of the more important discussions divorcing spouses will have relates to how they will financially uncouple.
In New York, the courts have determined that property acquired during the marriage will be divided equitably upon divorce. This term “equitable” differs from “equal” in that the financial division shall be “fair” as opposed to split exactly down the middle. The idea of equitable distribution often looms large when it comes to the divorcing couple’s largest asset: the marital residence. This is the place that the parties called home together, where the children were raised, and where a large portion of the marital assets reside.
What makes the division of the marital residence even more complicated is the idea that a residence is different than any other asset. You cannot easily withdraw funds from a residence the same way that you do with a bank account. Importantly, you feel a greater connection to this asset than you do with a bank account. Switching banks from Citibank to Chase does not elicit the same emotional reaction as moving from the place you called home.
For that reason, absent an agreement to sell the home and equitably share in the proceeds, many couples find it challenging to determine which of them will remain in the marital residence. When taking emotion out of the equation, this decision is one that should be made simply based on finances. Can you afford to keep the marital residence today? Will you be able to afford it tomorrow?
After considering what assets you must “give up” in order to keep the home, the next step in the analysis regarding your ability to afford the home today requires asking whether or not you can qualify for a mortgage. When one party buys the other party out of his or her interest in the marital residence, the party being bought out will want to be absolved of the debt (i.e., the mortgage) encumbering the residence. That requires refinancing the mortgage, which can be challenging if you are not the spouse that was earning the lion's share of the income during the marriage. If you find yourself in that position, here are a few ways for you to qualify for a mortgage on your own.
- What Happens If You Are Employed?
If you are the spouse that is employed, qualifying for a mortgage is typically an easier task than if you are a stay-at-home parent. In the case of the working spouse, the lender will want to get an understanding of your current employment and your income. These are some of the questions the lender will ask at the onset to determine if you will qualify to hold onto the existing mortgage on the residence:
- Are you an employee or self-employed?
- Is there consistency with your income or has it been fluctuating?
- Was there a big gap in employment (perhaps you were the spouse who stayed home and raised the children) and you just recently resumed working?
This is not an exact science, but typically someone could qualify for 4x their annual gross income if they are an employee and 4x their net income if they are self-employed. For example, if someone says they make $100k per year, that person can roughly qualify for a loan of $400k.
Again, this is not perfect, and ultimately, an inquiry into that person’s monthly debt obligations (i.e., credit card payments, car loan/lease, student loans, mortgage payment, property taxes, etc.) will need to be made to truly determine his or her eligibility. Consider this more of a back-of-the-envelope calculation.
- What Happens If You Are Unemployed?
If you are the spouse that stayed home to raise the children or otherwise is not currently working, then the lender would have to derive an income from other sources. If you are the non-monied spouse, then the first place a lender would look is to your spousal support payments. If you are also the custodial parent, then child support may be another source of income for the sake of obtaining a mortgage.
In order to count spousal support and/or child support as income to help you qualify, you need to receive 6 months of regular and consistent payments. The monied spouse cannot decide to pay X amount one month and Y amount the next. Regular and consistent payments are key. Once 6 months of payments have been received, the lender can use that income for qualifying purposes. Also, it is critical that the payments last for at least 3 years, as this shows the type of longevity of income that lenders are looking for. It is crucial that any separation agreement carefully reflect these payments, so the documents can be shown to lenders as proof that these payments are incoming.
If the spousal support and/or child support is not enough to help you qualify for a mortgage, a few other ways to show income include the following:
- Taking distributions from a brokerage account or retirement account.
- If you are of retirement age, you may already have required minimum distributions set up. If you are not, there are options for you as well to set up distributions, but these options are fewer and far between.
- Using a pension or social security income is another way, if you are of age.
- Using an asset depletion method, where the lender would take your assets, divide them by a certain amount, typically 240, and derive a monthly income.
- For example, let’s say you have $2M in a brokerage account. The bank would take the $2M and divide it by 240, which would give us a monthly income of $8,333.
- Finding a co-signer. If there is someone in your world who is willing to co-sign for the loan, this is another option. However, this is person must be able to qualify for the loan. If you are the non-monied spouse, perhaps you can negotiate, as part of your divorce settlement, that the monied spouse co-signs the loan.
One of the biggest challenges facing divorcing couples is what to do with the marital home. Even once it seems an agreement has been reached, there remains the outstanding question: can the person buying out the other’s interest in the home qualify for a mortgage? Regardless of which side of the coin you fall on, using the above tips and consulting with a mortgage professional is paramount to your successful post-divorce financial future.
Ian Steinberg is a matrimonial and family law attorney with Berkman Bottger Newman & Schein, LLP. He can be reached by email at isteinberg@berkbot.com or by phone at (212) 867-9123. Scott Nadler is the Vice President of Mortgage Lending at CrossCountry Mortgage, LLC. He can be reached by email at scott.nadler@ccm.com or by phone at (973) 769-8180.