If home is where the heart is, then you can expect dealing with your house to be one of the more complex decisions you’ll face during a divorce.
Your house may be the biggest asset that you and your soon-to-be-former spouse own together, but it’s also key to your day-to-day practical needs.
Let’s take a look at some potential outcomes and what you need to know to make a real estate plan of action to see you through your divorce.
Who Typically Gets the House in a Divorce?
There is no hard and fast answer to what happens to the house in a divorce, but there are some key factors that will influence the outcome of your divorce and mortgage.
- Ownership and history – Was the house purchased together? Was it owned by one spouse before the marriage? Is it affiliated with either spouse’s family of origin?
- Location – If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, then community property law determines that all assets are owned 50/50 by married spouses. All other states rely on common law (equitable division) rules, which recognize ownership in terms of who individually purchased or is named as an owner of real property.
- Family disruption – If there are children in the family, will staying in the house help provide them greater emotional, social, and academic stability?
Who Decides How the House is Divided in a Divorce?
There are three main roads to deciding how to split assets in a divorce, including who keeps the house or whether it is sold. These are:
- Contested – Based on movies, you might think it’s common for a judge to pound a gavel down and decide who gets what in a divorce, but that’s fairly rare today. Only about 5% of divorces are categorized as contested, proceeding before a judge who determines an appropriate division of assets, support, debt, and custody.
- Uncontested – Any divorce settlement arranged outside of the court is categorized as uncontested, whether it’s accomplished quickly and calmly or after months or years of negotiation. In an uncontested divorce, the spouses agree on a plan for the house. Of course, this often involves a divorce attorney or mediator.
- Amicable – In an ideal world, both spouses would come to a compassionate and wise decision over coffee and danishes. Although it may be a challenge, the route to owning as much of the house split decision as possible is to come to terms amicably between the two of you.
In most cases, after divorce or legal separation, what happens to the marital property depends on how you and your spouse choose to handle the situation. Therefore, it helps to have a good understanding of your home rights and your options.
Do I Get Half the House in a Divorce?
How much you receive in a divorce settlement will be decided either by you and your spouse (and any professionals you involve) or by a judge if the divorce case or legal separation is contested.
In a common law state, you will likely receive half of the house’s value if:
- You purchased the house together
- Both spouses contributed to the down payment and mortgage payments
- Other marital assets and debts can be satisfactorily divided
In a community property state, each spouse is vested with 50% of the combined assets. If the house was the only asset, then you would receive half of its value.
More likely, the house is part of a broader range of marital assets, and you’ll receive half of those assets (which may or may not include the house) through either negotiation or a judge’s ruling.
How Is a House Handled in a Divorce?
Your house will be handled as both an asset and a practical matter. Unless you are in a common law state and the house was purchased and owned by only one spouse, it will fall under the umbrella of shared assets.
As a part of your financial portfolio, what you’re dividing is your home equity. Keep in mind:
- Calculating equity – Equity is a shifting amount, calculated by subtracting the remaining mortgage and any liens against the house from its current market value. Your mortgage amount decreases with each payment you make, while market value usually increases over time (though it may drop in the short term based on economic and other influences).
- Market value variability – While you can easily capture a quick thumbnail of your home value with an online calculator, the most accurate valuation incorporates the input of a professional appraiser and a selling agent.
Still wondering what to do with the house in a divorce? As a shared asset, home value can generally be divided in one of three ways.
1. Sell the House and Split the Equity
On the face of it, the simplest method of cutting the house in half is to put it on the market and split the proceeds between the divorcing spouses. Keep in mind:
- Price versus equity – Unless you own it free and clear, what you will divide is the amount of your current equity, not the full sale price of the house. It can be exciting to see that final sale price, especially after a bidding war, but remember, the bank grabs the first (and perhaps biggest) slice of the pie.
- Out-of-pocket costs – When you sell your house, there are expenses involved that will reduce your profits. You’ll have to either share these or negotiate who will cover some of these costs, which include:
- Repairs or staging needed before the house goes on the market
- Repairs or renovations agreed following a buyer’s home inspection
- Real estate agent fees (average 5-6% for sellers)
- Closing costs (average 1-3% for sellers)
- Relocation costs – It’s not just about the difference between the previous mortgage payment and the new monthly rent or mortgage. Budget for:
- Moving costs (full-service or rented equipment and any hired help)
- Incidentals (trash can, blinds, shower curtain—there’s always something)
- Time off from work
- The real estate market – If it’s a buyer’s market, you may want to wait to put your house on the market until you can score a better price for it. This could mean the difference of tens of thousands of dollars in locations with market fluctuations that are influenced by other factors.
Of course, this is not a suitable option if one of you wants to stay in the house. In that case, you’ll need to find a different way to split the equity.
2. Buyout by One Spouse and Remortgage
If one party wants to stay in the current home after a divorce, the most direct route is for that person to pay the one who leaves their part of the home equity (whether that’s 50% or a different agreed-upon amount).
To become the new legal owner, a divorce house buyout needs to be accompanied by a new mortgage under the sole owner’s name only.
Under a buyout, the new homeowner needs to be accepted for a loan as a single person and prove they will have the ongoing income to cover future mortgage payments. Keep the following challenges and expenses in mind:
- Credit score – The rate offered in a remortgage is based not just on prevailing interest rates, but on your financial profile. You may want to work on your credit score to improve your rate. Most lenders require at least 620.
- Immediate expenses – Remortgaging under a sole owner includes closing costs, which are usually 3-6% of the loan amount.
Remortgaging can also be a challenge if the person who wants to keep the house doesn’t have money to pay the departing spouse. Many couples do not have the amount of money needed for a buyout, with assets tied up in retirement accounts or investments (and the home itself).
3. Cash-Out Remortgage
Another way to transfer a house in a divorce is to shift ownership to one spouse under a new mortgage and pull out equity to pay the departing spouse.
Commonly known as cash-out refinance, a new mortgage can provide the opportunity to borrow extra money and take cash out of the house based on the amount of home equity currently owned. You can usually borrow up to 80% of your home equity—if you can qualify.
Sale-Leaseback: A New Solution for Divorce With House Involved
Divorce is one of the top 10 stressful experiences for adults, and worrying about being forced to move before you’re ready adds weight to that burden. Knowing your options can help you manage this time in your life.
A sale-leaseback can provide a new way for homeowners—at every financial level—to have full use of their home equity. Our mission is to provide an alternative way to convert the investment you already own without the red tape, financial qualification, and expense of remortgaging.
Through a sale-leaseback program, you can sell your home and convert your home’s equity to cash to split. From there, you or your ex-spouse can lease back the house for as long as needed.
Wondering if applying for a reverse mortgage is the right option? Before you make a decision, know the pros and cons of reverse mortgages for retirement If you are still unsure if reverse mortgage is right for you after reading this article, consult a financial advisor to discuss your options.
- FindLaw. Marital Property: Who Owns What? https://www.findlaw.com/family/marriage/what-s-mine-is-mine-what-s-yours-is-mine-who-owns-what-in.html
- OnlineDivorce.com. The Ultimate Guide to An Uncontested Divorce. https://www.onlinedivorce.com/blog/uncontested-divorce/
- OpenDoor. How much will I make selling my house? https://www.opendoor.com/w/home-sale-calculator
- Credible. Should You Refinance to Pay for Home Improvements? https://www.credible.com/blog/mortgages/refinance-for-home-improvement/
- NextAdvisor. Why Refinancing Might Be Your Best Option to Fund Home Improvements Right Now. https://time.com/nextadvisor/mortgages/refinance/home-improvement-refinance/