When you get divorced, you have three main options for how to handle the house you owned together.
You can sell the home and divide the proceeds. One of you can keep the house and buy out the other. Or you both can own the property together temporarily.
No matter which route you take, an important step is determining the home's value with an appraisal — or two or three.
How much is the house worth?
Sometimes in an amicable divorce, a couple will agree on one appraisal, says Mary Ballin, a certified financial planner and certified divorce financial analyst with Perigon Wealth Management, headquartered in San Francisco.
But if the spouses can't agree, "I like the three-party appraisal system," says Yonatan "Yoni" Levoritz, founder of a family-law firm in New York City. Each spouse hires an appraiser and together they pick a third appraiser. "Then we average out those three numbers."
Once there's agreement on how much the home is worth, you subtract what's owed on the mortgage, and the result is the home equity.
Consider a simplified example of how home equity can be distributed.
A couple owes $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.
Here's a closer look at the main choices for dealing with the house in a divorce.
Option 1: Sell the house and split the proceeds
"The most straightforward (option) is selling it and being done with it and dividing the money up as quickly as possible," Levoritz says.
Once the couple retires the mortgage debt, pays taxes and the sale-related expenses, they split the remaining money. In most cases, the sale happens after the divorce is finalized.
"You each just move on with your money in your pocket. … The other options get much more complex," Ballin says.
Option 2: One ex keeps the house
One ex-spouse keeps the house and buys out the other ex-spouse's share of the property. The best way to do this when there's a mortgage is to refinance. 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's share of the equity.
Start preparing as soon as you can if you think you'll choose this option, advises Phil Crescenzo Jr., vice president of the Southeast division at Nation One Mortgage Corporation in Summerville, South Carolina. Check your credit, get financial documents in order, avoid making big purchases or taking on new debt, and apply for a mortgage preapproval, he says.
It's important to consult with a lender early in the process because refinancing and buying out the other spouse may not be feasible. The now-divorced owner typically has to meet the lender's requirements based on one income, which may be unrealistic if the couple originally qualified with two incomes. And it's especially challenging now because mortgage rates have more than doubled in the past few years.
"Don't ignore the handwriting that's on the wall if you can't afford it," Levoritz says. As hard as letting go of the house may be, "you want to make sure you don't spend too much time or too much money digging your heels in."
For FHA, USDA and VA loans: If your current mortgage is federally insured or guaranteed, you might have an alternative to refinancing: You could apply to transfer the current loan from you and your spouse to yourself, a process known as assuming a mortgage. When a mortgage is assumed, the interest rate and payment term stay the same — a big advantage if the current loan's interest rate is lower than today's average rates.
FHA loans, insured by the Federal Housing Administration; USDA loans, backed by the U.S. Department of Agriculture; and VA loans, guaranteed by the U.S. Department of Veterans Affairs, are assumable. Most conventional mortgages are not.
To assume the mortgage, you'll need to apply and meet the lender's credit and debt-to-income ratio requirements. Contact your mortgage servicer for details.
Option 3: Both keep the house for now
Sometimes the time isn't right for selling the home. Maybe the soon-to-split couple owes more than the house is worth. Or they can't afford separate homes, so they continue sharing the house. Or one spouse moves out and one stays in the home while the kids are in school. Both ex-spouses stay on the title for a certain period.
Oftentimes, children are the reason that a couple keeps joint ownership. Eventually, the couple usually sells the house, or one ex buys out the other's equity.
If you plan to own the home together after the divorce, you'll need to work out who is responsible for making mortgage payments, paying for utilities and handling upkeep and repairs.
Managing the home maintenance and repairs is a balancing act. You don't want money spent on needless cosmetic changes.
"On the flip side of that, you don't want the property to depreciate as the result of one spouse's negligence in terms of taking care of the house or malfeasance in taking care of the house," Levoritz says. The divorce agreement will need to spell out the requirements.
Tips for approaching the decision
The options may look simple on the surface, but deciding how to split a house can be wrenching. Here are some tips:
"Make sure that you're putting your financial hat on — or get somebody that will help you put your financial hat on" when weighing the options, Ballin says. "The heart and mind don't always align."
Consider getting some support beyond your attorney. A financial planner can help sort out money matters, and a therapist can help untangle the emotional aspects. It's also helpful to get a reality check from a wise friend or relative who has your best interests at heart. "A lot of times you're too close to the situation to be able to make a good decision," Ballin says. "Having a thought partner that can play devil's advocate with you is important."
When shopping lenders, choose an experienced loan officer who has worked with divorcing clients, Crescenzo says.
Understand the costs of owning the home — not just the mortgage, but paying for utilities and maintenance — before deciding to keep the house. How do those costs compare with selling the home and finding another place to live?
Don't let stubborn determination lead to decisions you later regret. "You want to make sure that in the cost-benefit analysis of handling the real estate transaction, you view it more as a business decision than you view it as an emotional decision," Levoritz says.
