After you and your spouse say “I do,” a house is often your biggest investment-and as time goes by, it may also become your most valuable marital asset. Therefore, it can be a tricky thing to sort out when you and your spouse divorce, amongst other divorce issues like child support and child custody.
So, what happens to the house in a divorce? While putting a price on a home can be a complex and painful process, the first steps in a divorce house split are identifying your equity and understanding the possible ways that equity can be divided. Generally, the options for property settlement are a house sale, a buyout, or a split of equity.
In this guide, we’ll take a look at what you need to know about splitting your marital property in a divorce or legal separation and outline options that might work best for you.
How Do I Know My Home Equity?
Are you trying to determine your home value to split in a divorce process? In most cases, you and your spouse will own your marital home jointly. That means you’ve jointly developed equity in the home. The basic definition of equity is the part of your home’s value that you own at a given point in time.
Unless you arrived at your home’s closing in the distant past with a suitcase full of cash, your home was probably purchased with a combination of a down payment from you and a mortgage loan from a bank. Over the time you’ve lived there, your equity usually goes up with regular payments on the mortgage – unless you’ve taken on a second mortgage or have liens against the house from other financial dealings.
Your home’s fair market value is also a number that changes over time, usually growing larger. If you’ve owned your house for several decades, its current real estate value is likely significantly higher than the purchase price at the time you first became a homeowner. Although you may see an assessed value that changes each year on your real property tax statements, this is not the best gauge of current value.
For a better estimate:
- Average the results of several online valuation calculators
- Consult a realtor for a comparative market analysis (CMA)
- Get a formal appraisal (ideally, both you and your spouse should do this)
To figure out your current equity, subtract what you owe on your mortgage(s) from your home’s current fair market value. If you don’t already have a clear plan on what to do with your property in the divorce or if you do not live in an equitable distribution state, knowing home equity can be critical to making that decision.
3 Main Options for a Home Split in a Divorce
A split of the home as a real estate asset during divorce can take a few different forms, but whether you’re the divorcing spouse or not, you’ll both have to come to an agreement on which path to take. This can include:
- Selling your home and splitting the profits
- Deciding that one of you will take ownership of the home and buy the other out
- Taking current equity out of the home and dividing that money
Each of these three options has benefits and drawbacks depending on your family’s needs.
Option 1: Selling the House
If you’re both looking to move on, selling property before divorce settlement can be the cleanest split in your home and financial picture after divorce. Because there is probably a lot at stake financially as well as emotionally, this is a good decision to make after seeking out some help or ensuring you’ve thought it through carefully.
If you’re wondering if you can sell your house during a divorce, consider the following questions:
- Separate from the divorce timeline, is the timing right to sell your home?
- How does leaving the home affect each family member in practical terms?
- What is the psychological impact of doubling down with two destabilizing losses?
Pros of Selling the House
If you have the resources and support to get it done now, there are some definite benefits to a home sale and split as part of divorce proceedings. These may include:
- A fresh start – Staying in a home means living in the same place where so many memories were created. Whether it’s remembering an argument or a wonderful evening, walking through a place with some of your best and worst moments can be a hindrance to healing and moving forward.
- Efficiency – Assuming you plan to live separately going forward, selling the home and moving out can make a lot of sense. Sorting and organizing possessions to divide them can also act to help donate or ditch what no one wants and prepare the home for staging.
Cons of Selling the House
Who wants to be the subject of a sad country song? Let’s hope your dog is fine and your truck is running, but divorce, moving, and having to split the home are both in many experts’ lists of top stressors for adults. Be prepared to deal with:
- Stress – In the best of circumstances, selling a home is time-consuming and headache-inducing. You may need to do repairs or renovations, clean and stage the house, and vacate the real property for showings and open houses, all on top of arranging for a new home and preparing for the move.
- Yet more stress – Did you read “in the best of circumstances” above? While handling everything in the previous bullet, you’ll also need to communicate, coordinate, and come to an agreement on all of these issues and steps with your soon-to-be-ex.
Option 2: Single-Party Buy-Out of Home Equity
If you’ve decided that either you or your ex is going to keep living in the home, then choosing to split the home value after divorce can be done by the individual refinancing the current mortgage. This will:
- Pay off the current jointly-held mortgage
- Remove the departing person from the mortgage and convert it to a sole borrower
- Allow for taking equity out of the home and paying off the departing person
This does presuppose that there is equity in the home to take out and that the remaining person can qualify for a new mortgage or rental on their own.
Pros of Single-Party Buy-Out
Finding a way to turn all joint marital assets into a single asset is essentially what divorce negotiations come down to. Deciding who stays and who goes might be an early step in separation, but settling on a single permanent owner for the family home may include factors such as:
- Family stability – With all the changes that are taking place, keeping children in their current homes can help provide continuity and a safe space. Moving schools, leaving friends, and losing the familiarity of bedrooms, play spaces, and neighborhoods on top of divorce can increase stress and fear for kids.
- Dream home – If one of you is a nester who has spent years creating the perfect dwelling, that could make it an easier choice to decide whether to stay or go.
- Clarity of home rights – Going through the process of buying out the home can help make a clear line in the sand. If there is continued contact, such as visitation or co-parenting needs, a buy-out can help clarify territory: Yes, you need to knock, you need to be invited in, and your keys don’t work here anymore.
Cons of Single-Party Buy-Out
The challenges in one person buying out the other, instead of a split in home value after divorce, seem to come back to money, money, money. If it looks like an option for you, do your calculations and check them twice. Keep in mind:
- Upkeep expense – If the house is the largest asset, it may not be doable to divide the financial burden into two, with one person needing to maintain it singly going forward, and the other needing to cough up the buy-out amount.
- Qualification limits – The person keeping the home not only has to be able to make mortgage payments and pay for home expenses but also has to qualify for the mortgage. This is analyzed based on credit score, income or employment status, and debt-to-income ratio.
Option 3: Simple Equity Division
How is a house divided in a divorce? Ultimately, this is up to the divorcing parties, and the options are only constrained by your imagination and willingness to cooperate. Also, keep in mind that the community property rule is used in nine US states to determine how to divide marital assets. The community property rule states that marital property, also known as community property, should be divided equally between the two spouses. Separate property, or non-marital property, on the other hand, is exactly what it sounds like. Property that a spouse owned prior to the marriage, inherited property, and gifts are typically considered separate property, though some states’ definitions vary. Be sure you know your state’s rules on marital and non-marital property division.
In addition, some divorcing couples may wish there was an option to divide the equity without having to sell the home. That’s because there are several disadvantages of refinancing that you need to consider. After all, taking the process of selling or refinancing the house out of the long to-do list you’re faced with in a divorce or legal separation could remove a significant stressor. Before making this decision, make sure you know the pros and cons of co-owning a house after divorce.
Fortunately, there are now solutions that make it possible to stay in your home while converting the equity you already own to help with asset division.
Simplify Your Home Equity Split with a Sale-Leaseback
Divorce can be a complex and stressful time. While everything else is up in the air, why not make the division of home equity as easy as possible with a sale-leaseback solution. In short, a sale-leaseback program acts as a cash buyer, giving you fast access to your equity without the long process of putting your house on the market or the fees associated with traditional realtors. Then, these solutions make it possible for one or both parties to stay in the house for as long as they want or need while paying rent.
Sale-leasebacks are a good alternative to selling or refinancing a marital home during the divorce process. They provide an easier way to convert home equity to cash for more homeowners, particularly groups who are unhappy with what traditional banks and lenders are willing to offer.
While putting a price on a home can be a complex and painful process, the first steps in a divorce house split are identifying your equity and understanding the possible ways that equity can be divided. Generally, the options are a house sale, a buyout, or a split of equity.