The first step in deciding how to handle the mortgage in a divorce is getting an appraisal — or two — to determine the home's value.
By Holden Lewis
When a couple get divorced, they have three basic options for what to do with the home they own. No matter which option they choose, the first step is determining the value of the house. The most reliable way is to get an appraisal — or better yet, two.
Even in an amicable divorce, it’s wise for each spouse to order an appraisal, says Mary Ballin, a certified financial planner and client advisor for Mosaic Financial Partners, in Walnut Creek, California. Getting two appraisals protects both sides, as it’s unlikely that two appraisals would be inaccurate in the same way, she says.
After the divorcing couple agrees on the value of the home, they subtract what they owe on it. The result is their equity.
How is home equity divided in a divorce?
There are three main ways to handle the home:
- Sell the house and split the proceeds.
- One ex-spouse keeps the home and refinances the mortgage to remove the other from the loan.
- Both former spouses keep the house temporarily.
Shawn Leamon, a certified divorce financial analyst and founder of the website Divorce and Your Money, advises weighing all the options. Here’s a closer look at the three basic ones:
Option 1: Sell the house and split the proceeds
The cleanest way to divide the home’s equity is to sell the house. Once the couple retire the mortgage debt, pay taxes and the sale-related expenses, they split the remaining money.
By selling the house, the two exes can more easily untangle from each other’s lives, Ballin says.
Option 2: One ex keeps the house
The best way for one spouse to become the sole owner is to refinance the mortgage. Refinancing serves three purposes:
- It removes the other spouse from the mortgage so the house is no longer a jointly held asset.
- It pays off any outstanding mortgage debt, replacing the old mortgage with a new loan.
- It frees up cash to buy out the other ex’s share of the equity.
In a refinance, the now-divorced owner typically has to qualify for the mortgage based on one income. That can be difficult if the couple originally qualified for the mortgage based on two incomes. Sometimes it’s unrealistic to expect one ex-spouse to be able to afford the home, says Elizabeth Rose, branch manager for Movement Mortgage, in Dallas.
“I would recommend to both people, whether they’re being civil or not, to work this out beforehand,” Rose says. “You need to know exactly: Can the other person qualify?” The sole owner has to have a suitable debt-to-income ratio.
In such a buyout, “there has to be an agreement on what the value is,” Rose says. That’s why paying for more than one general purpose appraisal report, or GPAR, is important.
Option 3: Both keep the house
Sometimes the time isn’t right for selling the home. Maybe the soon-to-split couple owe more than the house is worth. Or they can’t afford separate homes, so they continue sharing the house. Or one spouse moves out, but pays the mortgage while the kids are in school.
Most commonly, children are the reason that a couple keep joint ownership, Ballin says. Eventually, the couple usually sell the house, or one ex buys out the other’s equity.
How much equity do you get?
Here’s a simplified example of how the home equity can be distributed.
A couple owe $100,000 on a house appraised at $400,000. That means their equity is $300,000 (the $400,000 home value minus the $100,000 owed). If they split the equity equally, they each have $150,000 in equity. The person who keeps the home would need a $250,000 mortgage:
- $100,000 to take over the outstanding loan balance
- Plus $150,000 to buy out the ex’s half of the equity
So in this example, the ex who leaves the house gets $150,000, has no mortgage and no stake in the house’s future equity; and the ex who keeps the house has $150,000 in equity, a $250,000 mortgage and the future value of the house.
Each of the above scenarios — selling the house, keeping the house, one ex-spouse buying out the other — has variations. Spouses have been known to be quite creative in the ways they sunder their bonds.
For example, instead of paying each other cash, the exes can exchange assets such as retirement funds or even cars, Leamon says. The key to a successful outcome is to keep all options open from the beginning when it comes to the house.
“Don’t assume that you’ll have to sell it or you’ll have to keep it, or anything in between,” Leamon says. “Just figure out what your options are so you can make the best long-term financial decision.”
Holden is a personal finance writer for NerdWallet. He previously covered mortgages and real estate at Bankrate.