Do you know what to do with your marital home during divorce?
If you are getting divorced, your marital property, including your home, will need to be divided between you and your spouse.
For most divorcing couples, the largest asset they have is their family home. Many emotions are attached to the home, but there are also many practical concerns that must be considered when deciding what to do with the marital home.
Typically, there are three options.
3 Options to Consider When Deciding What to Do With Your Marital Home During Divorce
1. Maintain joint ownership after the divorce
In my opinion, there are very few times when this might be a good idea. Here’s why:
If you are divorcing, there are probably very good reasons for the divorce, and maintaining joint ownership of such a large asset is likely to perpetuate or even increase the friction between you and your spouse. Additionally, it will complicate the negotiations of your Divorce Settlement Agreement and, therefore, it will probably also increase your legal expenses.
If you will continue to jointly own the home after your divorce, your Divorce Settlement Agreement must clearly and explicitly state in great detail how long the home will be held; who is going to pay the mortgage, real estate taxes, and other expenses such as repairs; when the house should be sold; and what happens when it’s time to sell.
What if you can’t agree on which real estate broker to use, what price to list the home at, when the price needs to be reduced and by what amount when the property doesn’t sell? There are so many “what-if” scenarios and unforeseen things that can go wrong, that I almost never recommend this option.
2. Sell the home
At first glance, selling the marital home during divorce might seem like the easiest option. You can sell and then both move on to buy or rent separate residences with the proceeds. But, as I have learned over the years, selling a home while going through a divorce requires a real estate agent who has training and experience working with divorcing couples. Remember, you and your spouse are divorcing. Emotions are running high and you and your spouse might not even be speaking to each other.
Selling your home as you get divorced is significantly different from selling a home as a single individual or a happily married couple. You’ll want to find a real estate agent who specializes in divorce real estate sales. It should be someone whom both of you can trust and will defer to when tough decisions need to be made.
You will both need to agree on the sale price of your home. Your real estate agent can show you and your spouse comparables of what has sold recently in your neighborhood or area and then the two of you will need to make a final decision. Personally, I recommend using a licensed real estate appraiser to determine the fair market value of your home. If one spouse is being difficult, it might require the intervention of the divorce attorneys.
Your real estate agent should be ready to sit in the middle of these discussions and talk frankly with each party. That’s another reason to use a divorce real estate agent. You need an agent who has experience working with divorce attorneys. That agent may even need to testify in court if your spouse is totally uncooperative or trying to sabotage a sale.
There are also a few other things to consider.
Who is responsible for maintaining the home and keeping it clean for showings as you go through a divorce? In some cases, both parties should have some responsibility for upkeep, bills, and maintaining the home. This includes being on hand to ensure the house is cleaned regularly and is tidy for showings.
Who makes the final decisions for negotiations? Both parties need to be reasonable if a potential buyer would like to negotiate the price of the home.
What happens when the lender’s appraisal does not come in high enough? Appraisals are an issue when you are selling your home because your buyer will probably have to obtain a mortgage. If your home does not satisfy the mortgage lender (the appraisal comes in too low) you may need to lower your selling price. What if one of you does not want to accept less money?
Ask yourself: Do you need a quick sale, or should you wait for top dollar? Which of you will handle the details? How will you agree on a realtor and asking price? Who will pay for necessary upgrades to make the home more desirable? Who will handle the price negotiation? Your Divorce Settlement Agreement will need to detail all of this. The answers to these questions can complicate the sale of a house for a divorcing couple since there are bound to be disagreements.
You will need to work closely with your divorce attorney and a real estate professional who specializes in divorce so you can get through these issues and sell the home as quickly as possible.
3. Let one spouse keep the home
This is a very popular option, but one that requires a significant amount of planning with both your divorce attorney and a divorce mortgage expert. When children are involved, one parent may want to keep the home as leaving can cause great distress and upheaval for children, especially if they need to switch their school and make new friends.
However, the decision for one parent to stay in the marital home during divorce will need to be made carefully and early in the divorce settlement negotiations.
You need to know the answer to the following as soon as possible, since your negotiations on the division of other assets and the amount and duration of any alimony and/or child support payments could be impacted.
Can you buy out your spouse? The spouse keeping the home will need to buy out the other spouse’s share of the home’s equity. What does this mean? As with a sale of the home, an appraisal is necessary to determine fair market value. The spouse keeping the house would be responsible for paying a portion of the equity (often half, but not always) to the other spouse (equity = home value minus existing mortgages and liens). This is where things can get complicated.
How will the spouse who is keeping the home pay such a large sum to the other spouse? If there aren’t sufficient other assets (an investment portfolio or retirement assets to split) the spouse keeping the home can try to refinance with an equity buyout or cash-out mortgage, providing additional funds to pay the ex for his/her share of the home’s equity.
However, that opens you up to issues of refinancing your home when you divorce.
Before I explore this process, I want to caution you to proceed only with the guidance of your divorce attorney and a mortgage professional who has training and experience with divorce lending guidelines, which can be quite complicated. Giving up rights, agreeing to refinance without knowing if you will be approved, or taking ownership of the house too soon could cause significant and severe complications if your divorce negotiations become contentious. For instance, if you agree to refinance within 60 days after the divorce, what happens if you are rejected for the mortgage or if you haven’t yet met the lender’s requirements for a refinancing?
Will you be able to refinance the home in just your name?
If one spouse wants to keep the family home, refinancing is almost always necessary to remove the other spouse from the mortgage obligation on a house they will no longer own. Depending on the particulars of your situation, refinancing can help pull equity out of the house to pay off the spouse not keeping the house and to remove his or her name from the mortgage.
However, a refinance in the context of divorce can often be a complex process. A spouse refinancing a mortgage in just their name needs to have sufficient qualified income from a job, alimony, child support, or, as is often the case, a combination of all of these income sources with several confounding factors including the following:
- In general, to count as qualified income, alimony and/or child support must each have already been received consistently and on time for the last 6 months and must continue for at least another 36 months after applying for the mortgage or after signing the note, depending on the type of mortgage. Any lender is going to want to see the signed Separation Agreement or Divorce Settlement Agreement along with bank statements showing deposits. They will also want to see your children’s birth certificates to make sure they will not reach the age of emancipation (18 or 21 depending on the state) during that 36-month period. If they will, the child support payments for that child will not qualify as income.
- Your other debts (student loans, car loans, and credit card debt) may create a problem with your debt-to-income ratio.
- Current real estate market conditions and interest rates could impact a lender’s decision. The appraisal needs to be high enough for the mortgage you want to obtain.
- If your credit score is low, you might not qualify for the lowest interest rates, or you may need a cosigner. If it’s too low, you may not qualify at all.
And lastly, will you be able to afford the home on your own?
You need to make sure you will be able to maintain the property going forward. What happens if the furnace or roof needs to be repaired or replaced? How will you pay for that?
In order to answer these questions, you should have an honest discussion with your team (divorce attorney, divorce mortgage broker, and divorce financial advisor) about your budget after your divorce and include an honest look at the income, expenses, assets, and debts you will have on hand. You not only have to be prepared to independently handle the regular house expenses (mortgage payment, utilities, taxes) but have money available for upkeep, unexpected maintenance, and your regular day-to-day expenses.