In this episode as part of our “Real Estate In a Divorce” series, Jake Gilbreath and Brian Walters discuss rising interest rates on family homes and how that can impact a pending divorce.
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Jake Gilbreath: Okay, thanks for turning into For Better, Worse, Or Divorce Podcast. This is where we provide you tips and insight on how to navigate divorce and child custody situations. I’m Jake Gilbreath. I’m with my law partner, Brian Walters. Today, as part of our real estate in divorce series, we’re going to talk about interest rates, everybody’s favorite topic right now. Interest rates for family homes and how they can impact a pending divorce. I mean, we’re recording this mid 2023. Everybody knows interest rates have spiked up substantially from where they were just a year ago, and that can affect a divorce.
It can affect refinancing, a decision to sell a house while divorce is pending. It can affect financial planning obviously. If you’re going through divorce and you’re looking at what you could or could not afford for a house. It can affect the housing prices as far as that and other factors can affect housing prices as well. You’re dealing with a marital home that needs to be sold and is going to be awarded to a spouse like we’ve talked about in other podcasts. A lot of times that’s the main asset in a community estate. A dip in prices can, of course, affect a divorce and then there may be purchasing powers and all sorts of other things that play into a divorce.
It’s a dry topic, Brian, talking about interest rates, but I mean, we talk about it when interest rates are down, we talk about when they’re up. I guess say you’re in a mediation, you’re talking about folks that are going through divorce, say it’s a typical situation. They have a house, maybe they have some retirement, some cash, brokerage account here or there, but the house is the main asset and they’re trying to figure out what to do with their estate. How’s interest rates going to play into all of that?
Brian Walters: It’s a real issue and we’ve enjoyed since I think about 1982 basically a continuous decline in interest rates on homes. They were in the high 10’s, almost 20% back then, and they’ve over time come down. This is really the first time, whatever that is, 40 years that we’ve had to deal with this issue. The most common things or common way of dealing with an owned marital home when people are splitting up is that either they sell it, or somebody keeps it. And typically, that person who keeps it is going to refinance the home. This impacts things two ways.
First of all, if you’re going to sell it, in a lot of markets in the US the average prices of homes have gone down, but I think in Texas they’ve stayed the same or maybe gone up a bit. It depends probably on the specific market that you’re in. But even if prices have been stable, there are fewer buyers on the market because fewer people can qualify to purchase. Basically there’s a lot less real estate transactions going on, which may delay the time period it takes to sell the home. But I think more importantly is the refinancing of it.
The typical thing again would be someone would keep the house, buy the other side out of their equity, and refinance it. Because typically both spouses have their names on the mortgages and the person who’s giving up the house doesn’t want their name on the mortgage. They don’t want to have their credit impacted or their ability to borrow in the future. The person who is keeping the house and going to refinance it, since interest rates had been going down for 40 years, it’d be an easy decision, right? Like, oh, we have a 5% mortgage. I’ll just refinance it at 3%. I’ll actually end up paying less per month.
Great, good deal. It would be easier to qualify because the interest rates are lower and therefore the monthly payments are lower. But that’s not the case anymore. Now, it’s become the opposite. It’s a bad business decision to refinance it. You’re going to be paying more for the same home, and it may be impossible or much more difficult to qualify for it. It’s really impacted that particular scenario in particular where someone’s going to keep the house and refinance it. It’s become either impossible or much more difficult or much more a problem in my view of what’s occurring.
Jake Gilbreath: Yeah, I think that’s right. I think people forget, on the topic of refinancing, if somebody’s going to keep the home, which we’ve talked about in other podcast episodes. One spouse is keeping it, first of all, we got to get a value on it, like we’ve talked about in other podcast episodes. Like you said, there needs to be a buyout either with other marital assets or people can agree, then there’d be a note paid out over time secured by what we call a owelty lien. But like you said, it’s like most people are not going to want to keep the mortgage. If I’m not getting the house in the divorce, typically I wouldn’t want to stay on the mortgage, like you said, for your credit.
Maybe it may affect your ability to borrow. Some people come to me and they say, “My husband’s getting the house in the divorce or the wife’s getting the house.” Let’s say husband’s getting the house in the divorce. The divorce decree will just award the debt to him, and then we’ll call the mortgage company and just say, “The house is now the husband’s. It’s his problem, so take me off.” That’s just not how it works. The family code is very specific. It says obviously the divorce court can’t affect third party creditors, which is logical, like a divorce court.
Just because the Smith family is going through the divorce, a district judge can’t order Bank of America to do anything with regards to a note that Mr. and Mrs. Smith have side. If you’re the mortgage company, why would you let anybody off the mortgage? They don’t care about your divorce. They don’t care about what agreements you’ve made with your spouse. They just want to make sure they get their money. One way of making sure you get your money is to have both people still on the mortgage. It’s not going to be as simple as just calling and saying, “Pretty please remove me from this mortgage because I no longer own the property.”
It’s something that’s talked about a lot in mediations and, of course, at trial too. I’ve seen people forget to talk about the refinance issue or the fact that both spouses are on the mortgage in a divorce when they’re going through divorce. I’ve also seen people commit to a refinance without really thinking through it about whether or not they qualify or not. But you’ll see a lot of times a common thing to talk about in mediation would be, spouse A gets the house, but spouse A is going to refinance.
And if the spouse does not refinance say within six months or a year, then you got to sell the house to extinguish the other party’s liability on the mortgage. That’s probably the most extreme way of addressing it, but that’s something that certainly gets agreed to a lot or it could even be ordered by court. I see a lot of people in mediation go, “Okay, that’s fine, I’ll refinance. How hard can that be?” But even before the interest rates have spiked up, I’ve seen that people run into problems with that.
Brian, when you’re in mediation, you’ve got a client that’s getting the house and he or she’s committing to refinance. Obviously we’re not mortgage brokers, we’re not the bank, but what conversation are you having with your clients about that?
Brian Walters: That’s exactly right. I mean, the way to do this probably is send your client to a mortgage lender, mortgage broker ahead of time and have them run the numbers. Then get what’s called a pre qualification letter, if possible, from the mortgage lender saying, “Okay, it’s not binding, but we will probably loan you. You can get a loan of up to $1.1 million at X percent, 6.5% interest rate, which that monthly payment’s going to be da, da, da number.” They’ll at least have some numbers to work with and not be surprised. That can change. That’s not a binding letter.
Also, interest rates have been moving quickly up or down in recent years, so that could go out of effectiveness pretty quickly. But that’ll at least give everybody a pretty good sense of things and then proceed from there. I guess the other thing to do if someone is going to have to refinance and basically take a hit, maybe their monthly payment’s going to go up $1,000 a month just because they have to refinance. You may consider how you divide the equity up to take that into consideration, or the other person may just need to ride on the mortgage for X or indefinite period of time.
If you look at the futures markets, the bond markets and that kind of thing, most people expect interest rates to go back down again within two to three years to probably close to where they were. But of course, we don’t know that for sure. You don’t want to bet your client’s future on something that’s uncertain like that.
Jake Gilbreath: I always think family law is so interesting because there’s so many moving parts in a mediation, even when you don’t have kids involved. It’s not like a personal injury lawsuit, whether it’s a car wreck, which can be obviously complex leading up to mediation, but in mediation we’re just talking about a number. What’s the number that the defendant is going to pay the plaintiff, if any number, to settle the case? It’s one moving part. In divorce mediation, you have the question of “how are we going to divide up the overall estate?” What’s the value of things? What’s the character of things? What’s the percentage division?
Who gets what asset liquidity positions, tax impacts, the list goes on and on and on. All those things can affect this one issue of ability to refinance. It’s like, well, what’s my cash position going to be at the end of this divorce? If there’s child support because there’s kids involved, what’s my child support going to be, because that’s some of the mortgage company’s going to be interested in? Do I get spousal maintenance or some type of contractual alimony that I can show monthly income to the mortgage company? All that stuff is going to impact obviously lots of issues in the divorce, but this issue about refinancing, which leads into a general theme of ours.
We like to talk about communication a lot on this podcast, but also preparation. It is really frustrating to go into a mediation and the other side’s not prepared to talk about these issues and they haven’t really done the research. Or there’s been instances where I’ve served as the mediator or Brian, where you’ve served as the mediator, and nobody’s done any research or thought about this refinance issue or what we’re going to do with the house. They roll up with their clients the day of mediation. They start talking about it that day. That’s just not acceptable to talk about these types of issues the day of mediation.
That’s why it’s so important to prepare because the trial is the same, of course, but prepare for it because there’s a lot of things out there that could affect the decisions that you’re going to make either in mediation or in trial. Let’s talk about some alternative options. If refinance doesn’t make sense either at the moment or overall, there’s some alternative options. They’re endless, but some common alternative options. You could have a spouse receive the house, special warranty deed will be signed, transferring the house interest to that spouse. And then he or she signs what’s called a deed of trust to secure assumption, which basically guarantees that he or she is going to pay the mortgage.
And if not, the spouse that’s still on the mortgage, but doesn’t own the home can foreclose on it. That’s probably the least desirable for the person that’s not receiving the house because it’s still on your credit. Who wants to sit there and go deal with the foreclosure proceeding if the other side doesn’t pay the mortgage? But that is protection that can happen. Talk to me Brian about other options though as far as can folks hang onto a house post-divorce or come up with a mechanism to sell at a later time or refinance at a later time? What types of things have you seen?
Brian Walters: Like you said, there’s a lot of options. I mean, you could stay co-owners of the house. I think that’s not ideal. It’s pretty rarely done, but I’ve seen it done. The problem is all the questions that come up with house ownership, who’s going to pay the mortgage? Who’s going to pay the insurance? Who’s going to pay the taxes? Generally that’s the person residing in it. That’s usually not too difficult to resolve. But we do get into things like, well, what if there’s a damage to the house? What if there’s a flood or something like that? Who is responsible for it? Again, normally you’d think that would be the person who is living in it, but in some ways that isn’t fair.
If some random act occurs and there’s a $20,000 roof repair, well, how do we deal with that? You need to think about those things ahead of time. You need to have very specific enforcement mechanisms if you’re going to do that. This needs to be sold on this date, of course, saying we’re going to sell it can get complicated. Who’s the realtor? What happens if you list it for 800,000 and you get an all cash offer for 790 and another offer for 810, but it’s got a bunch of contingencies? Which ones do you take? What if one of you wants one and one of you wants the other? You need to think about all those things.
For those reasons, that’s usually not the best option, but sometimes it’s the only option or the least bad of all the options. You could also take the house and you both remain on the mortgage with this deed of trust to secure assumption. As we said, that’s got its issues. You’re still going to be on a mortgage in a home that someone else is living in. But my experience is that most mortgage lenders, if they see that you have that legal right to foreclose and that you’re not the primary person on it anymore they will usually disregard it, but that’s not a guarantee.
And lastly, if there are other community assets, let’s say that you need to buy your spouse out and give them $250,000 for their equity, there are a couple of options. Let’s say you had a million dollars in a money market account, one option would be to just pay off the mortgage in full. If we can’t refinance it, if we don’t want to with those assets or buy out the other side with those assets instead of having to refinance or something like that. There are a number of other options that obviously the more liquidity you have, the more assets you have, the greater net worth you have, the more options you’re going to have. Those are a few of the options.
Jake Gilbreath: By the way, least bad is a very divorce lawyer thing to say, to describe something that’s least bad. I’m stealing that. It’s all about planning. It goes back to planning. Do we have the liquidity to do this? And then what’s realistic? A lot of times people roll up into mediation, they just haven’t had a realistic conversation with what we can do with the home. I get it, a house is very emotional. It’s probably the most emotional asset that people have. Obviously people come into mediation with their children as their priority. But when it comes to property division, the house usually has a lot of emotion behind it.
And then sometimes people just aren’t realistic. You have somebody that wants to stay in the house. This is our home. Who wants to move? It’s a $2 million house and somebody wants to take it when he or she is $30,000 a year in income and the marriageable estate is underwater, or maybe there’s some retirement or something like that. It’s just not realistic. It’s hard to move. A lot of times people think at a certain age, point in their life that maybe they consider this the last home that they’ll ever live in, but sometimes it’s not realistic, or if we’re going to stay in the house, we have to be really creative and you got to think about that stuff before you go to mediation.
I’ll say as to your point, Brian, if you’re going to co-own a home or have some timeline to sell it, or if you’re going to pause before you sell it, I mean, that’s stuff that could happen. There’s so much stuff that could happen when doing that. One option that I typically do say is, here’s generally what we’re going to want to do with the house. Here’s generally what we’re going to list it. If we agree on a realtor now, great. I mean, we can’t guess at every single contingency. I do like to agree to appoint an arbitrator and say, we’re going to sell this house, or we’re going to co-own it and then sell at this date.
Here’s generally what we’re going to do. But if there’s any disputes, because inevitably there could be something that nobody thinks about, then we’re going to go to this arbitrator to resolve that dispute. That way you’re not dealing with receivership or going back to court or enforcements or anything like that. Back to your scenario, Brian, we got $790,000 cash offer, $810,000 offer with financing. This spouse wants to take that offer, this spouse wants to take that offer. Realtor’s saying whatever. You can just have a quick arbitration over it as opposed to being stuck in the court system. Lots of different ways of dealing with it.
It just got to be thought about and discussed before going into mediation or a trial. Let’s go to some questions that we’ve got and wrap up with that. Brian, one question that we’ve got I think on our website, or maybe somebody emailed us, but said, “if my spouse is behind on mortgage payments while our divorce is pending, will that impact my credit as well?” What’s the answer to that, Brian?
Brian Walters:
Think this assumes that you’re both on the mortgage. Because if you’re not, it won’t. But if you’re both on the mortgage, generally the answer is yes. Now, typically there’s a primary person and that would probably be more of an impact than the other one. But if you’re both on it equally, joint, and severally, the mortgage company’s going to report both of you to the credit agencies. And that’s not going to be good. Clearly you want to avoid that problem if at all possible.
Jake Gilbreath: Just a couple other questions that we got for people to wrap up. Both are more of a question for a mortgage broker, but we can speak to our experience. One person asked, “can I use my child or spousal support as income for qualifying for a mortgage?” Obviously, it’s up to the mortgage lender, but typically you’d want to do that research before mediation. But typically, they are going to be looking at in your ask when applying for a mortgage about what your monthly income is. And then they’ll ask for other monies coming in, like child support, spousal support. It’d be up to the individual mortgage lender. But that is something that’s typically considered.
Brian Walters: I’d say that works the other way too. They ask you if you’re paying any of those things out. If you are, that will probably impact your ability to borrow as well. Both directions.
Jake Gilbreath: Yeah, good point. And then lastly, somebody asked, “if my divorce decrees says my ex is responsible for our mortgage, will a lender still counted on my application?” I think somebody’s asking about the scenario. Let’s say my ex got the house in the divorce and is responsible for the mortgage, but we’re still both on the mortgage, either because we couldn’t refinance or we didn’t agree to refinance. If I go and apply for another mortgage, will that count on my application probably in the aspect of my income to debt ratio?
It’s up to the individual lender. We obviously work with mortgage brokers or lenders, we’ve actually done podcasts with the lenders that everybody should check out. But my understanding is generally not, particularly if you have a deed of trust to secure assumption. Obviously the divorce decree is showing that your spouse is your ex-spouse at that time is responsible for the mortgage. But it’s something that’s important to double check with whatever lender you’re speaking to before the mortgage.
Let’s say we have a scenario where I’m going to be technically on the mortgage, but my soon to be ex-spouse is responsible for it, they are getting the house. Are y’all going to count that on my application? It all goes back to research, preparation. There’s 1,000 different ways of dealing with this. It’s all impacted by interest rates, along with various other things, and it requires a lot of attention before just showing up to mediation or showing up for trial without having given thought to it.
That’s a broad overview of things, but we’ll wrap up with that topic for today. As always, if you like what you heard today, please do us a favor and leave a review. We appreciate all feedback. Feedback helps us better the podcast. If you have any follow up questions to this episode, or you want to talk to one of us directly about your situation, you can reach out to podcast@waltersgilbreath.com, or you can contact us directly through our website at www.waltersgilbreath.com. I’m Jake Gilbreath with my partner Brian Walters. Thank y’all for listening.
For information about the topics covered in today’s episode and more, you can visit our website at waltersgilbreath.com. Thanks for tuning in to today’s episode of For Better, Worse, Or Divorce Podcast, where we post new episodes every first and third Wednesday. Do you have a topic you want discussed or question for our hosts? Email us at podcast@waltersgilbreath.com. Thanks for listening. Until next time.
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