Finance

Divorce House Buyout 101: How It Works

December 12, 2021

Ready to slice that house in two metaphorically? So, what happens to the house in a divorce? When a couple decides against selling their home and splitting the profits after divorce, a house buyout enables them to change ownership from joint to single.

Whether you’ve been enjoying a two-block commute, working on a beautiful garden, or trying to give your kids a sense of stability against a changing backdrop, it often makes sense to keep the house in the family.

You may be wondering how you can cough up the money to buy your spouse out of the house. The good news? There are home equity alternative options to explore even if you don’t have a mattress full of cash.

What is a Divorce House Buyout?

Dividing the family home during a divorce is generally a choice of:

Who is going to live where
How to divide the house as an asset between the spouses
Coming to an agreement (or going before a judge if that can’t be done)

In a divorce house buyout, owner A pays the owner B their fair share of current equity to assume the sole title of the property (and presumably live there).

The key points involved are:

Calculating and agreeing on current equity
Deciding whether there is a 50/50 or another split in equity ownership
Determining whether the buyout will be via cash or in exchange for other joint holdings

If owner A is using cash, they’ll also need to determine a method of acquiring funds to make the payment.

How Does a House Buyout Work in a Divorce?

Although it’s possible to navigate the buyout process and agreement before finalizing the divorce, a buyout plan is usually included with the settlement submitted to the court for a judge to approve as part of a divorce decree.

The settlement encompasses the division of debts and marital assets as well as custody and support. Because of this, the equity split and payment to the spouse exiting the home could be either in cash or in a trade-off of equal value (retirement or investment accounts, other real property, etc.).

How Much Will the House Buyout Cost After Divorce?

There are two stages to figuring out the house buyout cost after divorce: determining equity and determining the split percentage. In the simplest situation, where you both own the house equally and come to an agreement on equity, you’ve got a 50/50 split.

But even with that situation, you’ll have some footwork to do before coming up with a dollar amount.

Step 1: Set the Equity

When you sell a house, you end up with an exact calculation of equity: it’s the amount of money that the buyer pays you after subtracting exactly what is owed on the house at the time of sale.

With a house buyout in divorce, you will need to:

Agree on a theoretical amount of money (what the house would sell for if you were selling it).
Set a date that can be used to identify what is owed in mortgage and liens on the house at that time.

Although you can get a quick market value of your house using an online calculator, you’ll need to hire an appraiser to complete a more official and detailed valuation. A comp from a listing agent is also a good tool (and frequently available for free), clarifying how your house compares to similar houses in your area that have recently sold.

To protect both spouses’ legal interests, it’s wise for each of you to hire a separate appraiser and bring those estimates to the table before you agree on a market value determination.

Step 2: Calculate the Split

If you bought the house together, contributed equitably to the mortgage payments, and invested in repairs and renovations jointly, then you’re probably looking at a 50/50 split of equity regardless of where you live. But that split may change depending on factors including:

Current ownership – Was the real property purchased before the marriage? Are you both named as owners on the property deed? If you inherited a family estate before the two of you met, a judge would be unlikely to award your spouse with half the equity.
Investment distribution – Have you both contributed (whether financially or otherwise) to marital property upkeep and improvements? If you added a guest house, a pool with a grotto, and a basement bowling alley with your earnings while your spouse spent their income on big game hunting, you might agree to a split that weighs more in your favor.
State property governance – Most states rely on common law or equitable distribution: if you owned it before marriage or bought it on your own while married and your name is on the deed individually, you keep it. But a handful of states still use community property law, which holds that spouses own everything 50/50 once they’re married. Regardless of when it was bought or by whom, it’s divided in half during the settlement.

Hopefully, you can both come to the table with the willingness to work out an equity split that you agree on instead of handing the power of decision over to a judge in a contested divorce.

If emotions are high or you’re unable to work together, negotiation through arbiters, mediators, or lawyers can still end with an uncontested divorce settlement.

How to Pay for a Divorce House Buyout

Buying a spouse out of the house means coughing up the dough if you’re keeping the home. This can be through:

Cash – If you have that much money in the bank (or can borrow from family), then you just write that check.
Cash-out refinance – When the house is remortgaged in your name alone, you could take out up to 80% of the current home equity at the same time and use it to buy out your spouse.
Equivalent value – If you have other joint marital assets, you could trade off your share to complete a buyout.
Home equity loan alternative: Sale-leasebacks provides a better alternative to home equity loans, cash out refinancing, and HELOCs. Sale-leaseback solution allows you to convert your home’s equity to cash by selling it. From there, the spouse who wants to keep the house can lease it back for as long as they choose.

Key Considerations for a Divorce House Buyout

A refinance divorce house buyout or remortgage will most often require the remaining borrower to qualify for the mortgage individually. This includes:

Credit score – Traditional lenders usually require a minimum 620 credit score.
Payment predictability – You’ll have to prove you can make monthly payments and pay off the loan by yourself. Usually, this is through:
A two-year income history
Proof of ongoing employment or income
A debt-to-income ratio (DTI) no higher than 36% to 43%

If your current mortgage has the now-rare feature of being assumable, or if your lender is willing to allow assumability due to divorce, then you may be able to transfer the mortgage from both of you to just you. Although you’ll save with transfer fees versus full closing costs, you’ll still need to individually qualify for the mortgage per above. Read our guide to divorce and mortgage for more information.

3 Alternatives to a House Buyout After Divorce

Now that you know how to do a buyout of the house after divorce, you might have realized that it’s not financially feasible for you.

There are a few ways to either put off major change for now or go another route in saying goodbye.

1. Cohabit With Continued Joint Ownership

Let’s start with the oddball. While rare, cohabiting after divorce is slightly more common these days. Co owning a house after divorce may be a choice to:

Maintain a two-parent home for minor children
Continue living in a location and environment that both parties desire
Pool resources for a set amount of time prior to either a sale or buyout

If you both are amicable and there are good reasons for both of you to stay, consider whether you could pull off continued cohabitation after divorce instead of a house buyout. For instance, if you both have deep ties to the community and a preference for the home environment you’ve created, perhaps working separate shifts or having your own areas (that fairy garden versus a media room in the basement?) would provide enough breathing space to make it worthwhile.

2. Sell and Split the Profits

On the one hand, putting it up for sale and splitting the profits seems simple and sets both of you up for a fresh start, but on the other, it’s still a lot of work.

Are you set on keeping this particular property and house, or is it simply important to stay in the same neighborhood or district? If the latter, you may want to revisit whether a smaller or different house nearby could be a better option than a house buyout after the divorce.

Keep in mind that selling and moving will entail:

Working together on pre-sale expenses and/or time for repairs, clean up, and staging
Closing costs (average 1-3% for sellers)
Realtor commission (average 5-6% for sellers)
Moving expenses and time

3. Split the Equity Without a Remortgage

If you’re not ready to move or remortgage, you can still access and split home equity proceeds with a Sale-Leaseback. This can be a great option to:

Delay sale until the market improves and your home appreciates in value
Improve your credit score before refinancing
Stay in the house even if you can’t qualify for the mortgage loan on your own

Home Equity Sale-Leaseback Options

How does a buyout work in a divorce? Ultimately, it’s up to you. Whether you’re already leaning toward a divorce house buyout or still exploring, being informed about all of your choices is the first step toward making a plan for your home when faced with divorce.

Sale-leasebacks provide a new way for homeowners to convert their home equity to cash without the expense, hassle, and barriers of the usual choices. Your home is one of your most important investments, and it’s your right to access the equity you’ve worked hard to grow. By selling your home and leasing it back, you get the cash from the sale and the flexibility to stay for as long as you need to figure out your next steps.

Key Takeaways

When a couple decides against selling their home and splitting the profits after divorce, a house buyout enables them to change ownership from joint to single. There are home equity alternative options to explore even if you don’t have a mattress full of cash. If you are still unsure of options for securing cash from your equity, after reading this article, consult a financial advisor to discuss your options.

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