The question of what happens to “the house” in a divorce is often one that requires careful consideration. In my experience, this issue is often clouded by emotions that can get in the way of the couple, or one spouse, making the best financial decision. I advise my clients to pause, set aside emotions and objectively consider all the significant, interrelated factors before deciding on what happens to the house. Consider the following:
First, is there equity in the home, and if so, how much?
If there is significant equity in the family home acquired during the marriage (present value minus amount owed on any loans), it is typically divided or allocated between the parties in some way. Home values can be determined by getting an appraisal of the property by a qualified appraisal company, then talking to an experienced real estate agent who is familiar with current market values and what comparable homes are selling for in the area. A realistic value may be somewhere between these two.
If there is significant equity in the home, one spouse may decide to keep the home while the other receives different assets of comparable value. If the parties don’t own other sufficient assets, it may be necessary to devise another way to buy out the person not retaining the home. Or, the couple may need to sell the home to equitably divide the marital assets.
Second, can either party realistically afford to keep the house?
The answer to this question depends on a number of interrelated issues, only one of which is whether either spouse can afford the monthly payments. Time and again, I see women initially insist on keeping the family home until I flesh out a budget and show them the real costs of this decision — short- and long-term. Maintenance and repair expenses, utilities, homeowners’ association fees, as well as property taxes and insurance costs can push home ownership beyond a newly single wage-earner.
If the couple would like to keep the children in the same schools, compare what it might cost to rent an apartment or smaller home in the area. Also, I try to demonstrate to the couple the long-term financial impact of this decision by projecting the above numbers out 10, 15, 20 years, and illustrating how not keeping the home may place them in a much better financial position in the future. Quite often, this is a major wake up call, especially for women, to see how keeping the home in lieu of investments can be financially unwise.
Third, consider selling the home to pay down debt or yield cash
In some cases, the home will need to be sold, ideally before the divorce is final. After payment of the real estate commission, mortgage balance, and other costs of the sale, the proceeds may be used to pay down or pay off marital debts, if any, or may be split equitably between the parties. Divorcing couples are sometimes surprised to learn that monies invested in renovations or remodeling may not bring a dollar-for-dollar increase in a home value/sales price.
If the home is to be sold, both parties will typically be equally affected by the costs of the sale and both will share the risks and benefits of a sale for less or more than expected. However, if one party retains the home, he or she will typically bear the entire cost of any post-divorce sale, including paying the real estate commission, closing costs, unexpected repairs to the property that may turn up during an inspection, real estate market or economic uncertainties, etc. That person also would have the sole risk or benefit relating to the ultimate selling price. As a result, keeping the house may not be a wise financial move in the long run if the plan is to sell it a year or two after the divorce.
If one party decides to keep the home, an appraisal is highly advisable to determine the current market value, unless both parties can agree on a present value. In many areas of the country, the assessed value of a home for property tax purposes is nota reliable measure of its current market value in a sale. Hire a home appraisal professional to determine the home’s value.
What about the mortgage loan?
Most people who own a home have a mortgage in the names of both parties. Though transferring a home into the name of only one party can be done quite simply post-divorce, that transfer does not change who is obligated on the mortgage.
Typically, removing a name from the mortgage requires that the loan be refinanced, which involves an application and qualification process. Even though both parties were on the original loan, it isn’t automatic that the party who wants to keep the house will qualify for a new loan, especially since his or her income and assets will change post-divorce. As well, new interest rates or other terms may not be as favorable as on the existing loan.
Couples divorcing are not required to refinance their mortgage loan, but this loan remains on the credit report of both parties until paid off. Even if there is a formal agreement making one party solely responsible for paying the mortgage, that agreement has no effect on the lender’s ability to pursue either party for payment. Also, this mortgage loan could prevent the non-owner from obtaining a mortgage on a new home until the original joint loan is paid off, or refinanced by the other party.