Sorry to send this out during the “month of love”. Divorces now impact over 41% of all marriages and from what I have seen they are the number one reason for credit scores falling. This article will focus on what happens during a divorce regarding real estate. Why can you get divorced yet be required to be “financially married” for years? Why is real estate so challenging in a divorce situation? What should you do/can you do?
First, for some disclosure, I’m not an attorney so this blog is not meant to give legal advice. Unfortunately, the basis of my knowledge is first hand seeing how it impacts real estate owners, borrowers, and their credit. Just today, I’ve gotten three eerily similar calls from borrowers that are now in a precarious situation due to a divorce. They have real estate assets but need cash.
Why is real estate so challenging in in a divorce?
- Not liquid & not physically divisible
- Real estate is not like a stock that you can pick up the phone and sell. It is not also divisible meaning one party can’t get half of it without a sale or other transfer. Furthermore, real estate transactions can take a while depending on the location, condition, and price.
- Typically there is a mortgage
- Most people have mortgages on their house. When a divorce occurs the lender still must get paid. Even if a marriage splits, both parties are on the mortgage. For example, one spouse could quitclaim the other one off the property, but the other spouse is still obligated to pay the mortgage
- Emotional attachment
- In many cases there is an emotional attachment of which party gets to keep the house which creates challenges to dispose of the real estate.
The Mortgage dilemma of Divorce
Even if one spouse gets the house, the other spouse is still on the mortgage. A lender will not release one spouse from the promissory note/deed so both spouses are financially “married” until either the house is sold or refinanced. This means that if one spouse is obligated to pay the mortgage, the other spouse is impacted if it is not paid on time. Furthermore, when the spouse who didn’t get the house tries to get financing, it will still show the other mortgage on the credit report and lenders will use this information when calculating debt to income ratios for the new house. I’ve seen situations where spouses were legally divorced but remained “financially married” for 5-10 years.
Other Impacts of a divorce
- Cash flow
- Divorces are expensive from legal fees to separate living arrangements. The costs add up quickly
- In most marriages, accounts are joint from credit cards, to cars, to bank accounts, to mortgages. If one spouse fails to pay, the impact is on both spouse’s credit.
- Ability to buy another property
- After a divorce, many couples are unable to buy other properties immediately as they are still a signor on a mortgage. Furthermore, with the expense of separate households and of the divorce itself, cash flow is very tight.
What should you do?
- Have good legal counsel
- Most divorce cases require good legal representation. Divorces can get messy very quickly so having a good attorney to keep things on track is a priority
- Understand your options and obligations
- With real estate involved, remember that both parties are on the mortgage and “financially married” until the property is sold or refinanced. Even if one party is taken off the deed, the mortgage remains
- Come up with a plan
- A divorce is a challenging life changing event. Ensure you have a plan to help you navigate these changes
How can a hard money loan help in a Divorce?
- All credit okay
- We are not credit score driven, we are asset driven so if scores have been impaired due to a divorce, we can help
- Used to buy out a spouse
- We have done many loans where there is ample equity in the house, but a spouse needs to be bought out. For example, one spouse leaves the house but must buy out the other one per a court order. Note: we are focusing on investment properties as opposed to primary residences. Our loans have also been used to buy out spouses in rental homes, etc…
- Quick cash/liquidity
- During a divorce, one party may end up with real estate as opposed to more liquid assets. We can lend on investment real estate (residential and commercial) to quickly turn equity into cash.
Taking something apart is always faster and easier than putting something together. Unfortunately, this is true of everything in the world other than marriage. The world is financially complex, and marriages have inherited this complexity. If you are going through this process or have experienced it, make sure you are taking steps to not only understand the complexity but the implications of the “financial marriage” and its impact on real estate and your credit.
If you have additional advice, please post in the comments below to help others 🙂
I need your help!
Don’t worry, I’m not asking you to wire money to your long-lost cousin that is going to give you a million dollars if you just send them your bank account! I do need your help though, please like and share our articles on linkedin, twitter, facebook, and other social media. I would greatly appreciate it.
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is a hard money lender specializing in private money loans / non-bank real estate loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide. To get started on a loan all they need is their simple one page application (no upfront fees or other games).