If you are wondering how to keep your house in a divorce, you're not alone. A lot of my clients have sentimental attachments to their homes. You've made memories there. It's where you raised your family. You may have close relationships with your neighbors or other strong ties to the community.
Even if you are not particularly sentimental, you may not want to think about moving amid all the other changes happening in your life. If you have read some of my other blogs, you probably already know my stance on keeping the house in a divorce. In a lot of cases, it does not make the most financial sense. Keeping that house when you cannot afford it is one of the most common financial mistakes that people make when going through a divorce. That said, if you are wondering how to keep your house (without sawing in two pieces!), here is some guidance.
First, take a look at your overall financial picture. If you are negotiating to keep the house and it's one of the more significant assets in your marital estate, you're likely going to be giving up quite a bit of other assets. What are you willing to give up in exchange for the house?
To get a full financial picture, determine the value of the home. I always encourage people to get an appraisal. However, if both parties agree on a value, then you can use that value for negotiations. Keep in mind that negotiating in mediation gives you a lot more flexibility and control than taking your case to court.
Once you know the value of the home, you can determine how much equity is in the house. Take the value of the home and subtract any loans on it. If there are no loans, the value and the equity are equal.
If there is no loan on your house, you have more options. As you negotiate your settlement, you could choose to offset the house with other assets. For example, let's say you are dividing things 50/50. The value of your house is $350,000. There is also an investment account that is worth $350,000. You might give up the investment account so that you can keep the house. Keep in mind that you'll want to know the cost basis for negotiating each of your assets.
If the house is in both of your names, you'll need to have your ex sign a Quitclaim Deed to have his/her name removed from the property.
If you do not have other assets to offset the value of the home or you do not want to offset the value of the home with other assets, you might choose to get a loan to pay your ex out on his/her portion of the equity. If you are considering a loan, take extra care not to negatively impact your credit score during your divorce.
Let's say you do decide to get a loan. Make sure that you have the cash flow to cover the ongoing payment along with taxes, insurance, and general maintenance of the house.
If there's still a mortgage on the house, sometimes it can be a little more challenging to keep the house in a divorce. Ideally, you will refinance it in your name so that your ex is no longer responsible for the debt. Some lenders will actually let you assume the existing mortgage, so it's worthwhile to check and see if you have that option.
The challenge, in some cases, is that the person who wants to keep the house does not have the income to get approved for refinancing. We recently interviewed a divorce lending specialist for tips on refinancing. You can read that post here.
Depending on how much equity is in the home, you might be able to refinance enough to pay your ex out on his/her portion of the equity. Let's use the same example as before. Your home is worth $350,000, but in this case, you have a $150,000 mortgage on it. Thus, there is $200,000 in equity in the house. You will need $100,000 to buy out your spouse’s share if you’ve agreed to a 50-50 split. To get the money, you refinance into a $250,000 loan in your name only and cash out $100,000 to pay your spouse. (We are excluding the transaction costs to keep the example simple.)
If you prefer not to refinance for the higher amount, you could negotiate offsetting the equity with other assets you are dividing.
If you do not have the income to refinance, you might be able to find someone to co-sign your loan. Regardless, if you are going to refinance, start talking to a lender as soon as possible so they can work with you on what you need to do to get the loan closed.
If there is little or no equity in the house, it's essential to consider whether or not it really makes sense for you to stay in it. Even if there are emotional attachments, this is a critical financial decision.
You could negotiate to keep the existing ownership and mortgage in place. However, make it very clear who is going to be responsible for the payments as well as any ongoing maintenance. Also, clarify what happens if a payment is missed. If both parties are on the mortgage, the lender will view both parties as equally responsible. Thus, any missed payments would negatively impact both parties' credit.
Remember that deciding if you should keep the house is not a purely emotional decision. Make sure that it fits within your overall financial goals. If you are not sure if you can afford to keep the house, contact us. We can work with you to create a broader financial plan to determine if it makes financial sense.