By Diane C Pappas, CDFA™
Solutions For Divorce LLC
Home is where the heart is. We all know that saying and most of us ‘take it to heart’. Your home is the place that you love the most, it is the place filled with your family and your memories and where you feel loved and most comfortable. The marital home – the place where you and your family live – is the true embodiment of marriage. You get married, buy a home and start a family. It’s part of the American Dream.
Now, all of sudden, the dream comes to an end and you are being told you may have to sell the home you love so much because you are going through a divorce. The thought of having to leave the house where you raised your children and spent so much of your time making it feel like home, is more than most women can bear. Fear of the unknown sets in. A common knee-jerk reaction is for the wife, usually the stay-at-home mom, to say to her husband, “fine, you keep the retirement account, but I want the house!” This could be the biggest financial mistake of her life.
If buying a home is part of the dream, then having to sell it in divorce is the end of that dream. It signifies a failed marriage. It’s no wonder then, that the marital home is the most emotionally charged issue in divorce. And because there is so much emotion wrapped up in the home, it makes people act irrationally and major mistakes are made.
As a Certified Divorce Financial Analyst™, I see this situation in almost every divorce case I work on. On the rare occasion, both spouses agree to sell the home as it makes the most financial sense. But more often, the wife comes to me and says she wants to stay in the home, no matter what. I take a quick look at the finances – the income, the expenses – and I know right away that she will not be able to afford it.
The most common scenario I see when I look at the bank statements and the expenses, is that the couple is living paycheck-to-paycheck with no cash reserves or any savings in the bank. Right away this tells me that they are living outside of their means and barely have enough income to cover their expenses. Once they divorce, their expenses are only going to increase, but the income will stay the same. We all know the saying, you can’t support two households on income that once supported one.
“But, I’ll be getting child support and alimony”, she says, “won’t that be enough?” Maybe, maybe not. There’s only so much income that can be split and it is rarely split 50/50.
Let’s look at an example – If the wage earner, or husband in this case, is making $150,000, and you apply the straight application of the MA Child Support Guidelines for two children, you get a child support order of around $34,000, assuming the recipient (wife) is not currently employed. This also assumes the husband is paying for health/dental insurance of around $394/month. In this simple example, there would most likely be no alimony because in Massachusetts, child support is calculated up to a maximum combined available annual gross income of $250,000, meaning if the income is $250,000 or under, and there are children involved, there would be no alimony as all the income would be allocated towards child support. (There may be other factors in your case where the support calculation could deviate from the guidelines.)
Prior to the divorce, the husband in our example was bringing home an after-tax income of approximately $114,000/year or $9500/month. This was just enough to pay for the lifestyle of living in the marital home.
Now, after the divorce, the husband will bring home an annual income of $68,000/year or $5666/month (net of child support and taxes) and the wife, will have $34,000/year or $2882/month – remember child support is not taxable to the recipient, nor is it tax-deductible to the payor.
It seems pretty obvious that if the wife wishes to stay and buyout the marital home and the lifestyle that goes with it, she is going to have a very difficult time paying the bills on $2882/month. In fact, based on these numbers, it is next to impossible. A shortfall of any amount is not sustainable for the long term. A typical scenario for someone in this position is that they will deplete all their assets just to keep the kids happy and their head above water, even liquidating retirement assets well before retirement age. Another big mistake.
Aside from cash flow, another issue that has to be addressed is the mortgage on the house. If the mortgage has both spouse’s name on it, the spouse buying out the other spouse will have to refinance the existing mortgage to remove the out-spouse’s name. In order to do that, you need to show a history of stable income and have it be enough to qualify for a new mortgage on your own. This becomes a problem when a stay-at-home mom has no other income except support, because most mortgage companies will want to see a 6-12 month history of receiving the income before they will consider lending to you.
By some miracle, you may qualify for a refinance on paper, but that does not mean you can really afford to keep the home. A bank does not look at your everyday living expenses when qualifying for a mortgage. They only look at the PITI (principle, interest, taxes & insurance) and any long term or revolving debt. They don’t take into account your grocery bill, the kid’s orthodontic bill or the fact that your house needs a new roof.
Any time there is a possibility of a refinance, it should be explored prior to signing the Separation Agreement. All too often, I see Separation Agreements that say the in-spouse has to refinance within 60 days of the filing of the agreement or they will have to sell the home. If we know ahead of time that the bank requires 12 months of receiving child support, then the agreement can be written in such a way as to avoid a possible contempt charge and an expensive trip back to court.
A House Can’t Pay the Bills
In a previous blog post, ‘The Importance of Cash Flow in Divorce’ , I wrote that it is very important to understand what it takes to run your household because there are so many hidden costs to owning a home on your own.
People usually underestimate the true costs of running a household. If your husband was handy and took care of the landscaping and snow removal and other household repairs, you may have to pay someone to do those post-divorce. On average, you can expect to pay 1 – 4% of a house’s value in maintenance costs. That’s a lot of extra money to have to come up with on a fixed income of child support. And most people do not realize how expensive it is to raise children, especially if they live with you for the majority of the time. Child support is only meant to cover the basic needs of a child, but as we all know, there is more to life than that.
The stress of constantly worrying about how you are going to pay for something will take it’s toll. Your stress and anger about the situation will trickle down to the children. Everyone will be impacted. You may even begin to hate the house you thought you couldn’t bear to sell. It’s great that you have all that equity in the house, but the house can’t pay the bills.
What’s a Woman to Do?
Think financially, not emotionally and enlist the help of Divorce Financial Professional at the beginning of the process, to see if staying in the home is a financial possibility. In some cases, you may be able to continue to own the home jointly with your ex-spouse for a few years after the divorce, until your youngest graduates high school. This will keep you in the house and help to maintain the status quo for the children, without destroying your finances and negatively impacting your future. There are other options for you and your spouse to consider, but only a trained professional, like a CDFA™ can help you determine which option is right for you.
Remember I started this post with ‘home is where the heart is’? It doesn’t really matter what house you live in, a house is just a shell. What matters is that you are able to live in a home and comfortably be able to pay the bills, take care of other expenses as they arise and most importantly, love your children. You can do that anywhere and in any house you decide to live in.