As your marriage comes to an end, one of the largest and most complicated decisions you may have to make is what to do with the family home. Whether you and your spouse ultimately come to an agreement on what will happen, or it goes to the court to determine, ownership of the home almost never stays with both spouses. With the division of that asset also comes the division of the liability–the mortgage. Here are some things to consider as you look at the future of the marital home and the associated debt.
Often when ownership of the home goes to one of the spouses, they will refinance the mortgage. The new loan will be in their name only, which removes the ex’s responsibility in case payments are late or missed. It becomes a personal, individual debt.
A refinanced mortgage doesn’t mean the ex no longer owns a share of the home. It is critical to remember the ownership of the debt and ownership of the property are not directly related. Refinancing only takes care of the debt. In order to legally sever the ex’s claims to the property, they also need to be removed from the title.
In most cases, this can be accomplished by a quit-claim deed. This is an efficient, simple way to establish that your ex no longer has a legal claim to the property. Your divorce case lawyer can advise you on this process.
Divorce can create turmoil in your finances. That can complicate your ability to refinance your loan. You will be the sole guarantor, which means you will need to qualify for the full loan amount based on your income and credit score. If you will be receiving alimony, many lenders will consider that part of your income, making it easier to qualify.
While the desire to stay in your old home during a time when so many other things are changing, be mindful of not over-extending yourself financially. Not only do you have to get a lender to agree to issue you the loan, but you will also have to make the payments. Carefully consider the implications of that and make sure you are being realistic.
Depending on how your settlement is structured, you may have to buy out your Ex’s interest in the home. In some cases, one spouse will simply be awarded other assets to make up for the equity that goes to the spouse who will be keeping the home. But in many cases, the spouse who retains ownership of the home must buy out some or all of the ex’s share of the equity. If they don’t have the funds available to do that, there are a few options.
- First is a cash-out refinance. That means that when the loan is refinanced to go into only one person’s name, the new loan is issued for an amount greater than what was owned on the previous mortgage. The borrower will receive the difference, which they can then use to buy out a spouse.
- Another option is to have a home equity loan or home equity line of credit issued, after the refinance. You can pay your ex using that loan against your equity in the house.
- A third option is a combination of a cash-out refinance and an equity loan.
In all cases, you will need to have sufficient equity in the home, and you will need to qualify for the various loan amounts.
What does all this look like in execution? It can be helpful to look at an example with specific numbers. If the marital home is worth $400,000 and you owe $300,000 on a loan, you have $100,000 in equity. If that is split equally between the spouses, you each have a claim of $50,000. If you keep the home, that means you need to buy out your ex’s $50,000.
You might refinance, and instead of getting a loan for the $300,000 you previously owed, you borrow $325,000. That gives you $25,000 you can use toward buying out your ex’s share. Perhaps you pay them an additional $5,000 from your savings account or liquidate other assets you received in the divorce settlement. Then for the remaining $20,000, you take out a home equity line of credit against the $75,000 in equity you have in the property.
In many cases, it may not make sense to keep the home. Perhaps both spouses want a fresh start, or maybe neither can qualify on their own for the remaining balance, or they wouldn’t be able to come up with sufficient funds to buy out the other person’s interests. Whatever the reason, divorce often leads to the sale of the home. This can often be the easiest method for dealing with the shared home. There is no need to argue over the current value in order to determine how much equity one spouse needs to buy from the other. You sell the home, and you each walk away with half of the proceeds, assuming your settlement splits the home evenly.
Deciding what to do with the place you called home during your marriage can be an incredibly emotional choice. You need to balance your emotional attachment to your home with your new financial realities. When in doubt, consult with a divorce attorney to make sure you have factored in all elements of choice, and you aren’t walking away with less than you are due. Whether you decide to keep the home, have your ex buy you out, or sell it and have a fresh start, once you’ve dealt with the marital real estate, you are one step closer to making a happy home for yourself.