Negotiating a Home Equity Buyout When Getting a Divorce

The best way for divorcing couples to deal with their marital home is to “buyout” the interest of the other. Other options include selling the home, or continuing to co-own the home. The parent with custody often buys out the other parent to ensure that the children are able to stay in the home. This has obvious advantages: It provides stability and continuity for the children, and you don’t have to sell if conditions are bad.

Each party is responsible for their own risk in any buyout. Both the retaining spouse and the exiting spouse may lose future appreciation. However, the remaining spouse could feel that the value was too high in the event that the property falls in value later. The remaining spouse may also find it difficult to finance a buyout.

The buyout could be done over time with both spouses still having an interest in the house. Any agreement that you make regarding a gradual buyout should be included in your settlement agreement. The buyout usually occurs as part of a divorce decree. Either the remaining spouse pays money to the seller spouse (usually by refinancing their home and taking out a new loan on it) or gives up any other marital property that is equal in value to the exiting spouse’s. One spouse may be allowed to keep the house, but one of his or her retirement accounts and marital investments will be forfeited.

How do we determine the value of a home?

You won’t be able to have a real agent in the buyout process if you are keeping the home so you will have to find another way to determine the fair market price of the property. You might not need to worry if the house has been appraised recently (within the last 90 days) or if your spouse and you have similar opinions about its value.

If you and your spouse are not able to agree or want more information, you may ask a realty agent for information on recent sales prices in your area for houses similar to yours. These are commonly called “comps”. If you enter your address, you can go online to one the websites that will calculate your home’s worth.   However, these options are not as accurate as a licensed appraiser’s opinion. 

There are many differences among houses so comps are not always an accurate way to determine a house’s fair market value. An online estimate is also not possible. A real estate appraiser is the best way to be sure. Although this will cost you $300-900 for a report and formal appraisal, it is a great way to resolve any disagreements about the house’s worth. If the appraisal fails, you will need to go to court to ask a judge for a determination of the house’s value. The appraiser’s report will be used by the judge. If there are more than one appraisal, the judge may use the average.

After you have agreed upon the fair market value of the buyout, you can decide to adjust it for any number of reasons. These are some common adjustments.

Deferred maintenance

The remaining spouse may be able to convince the exiting spouse to lower the buyout price if there is work that has been delayed during your marriage. If the selling spouse owes money to the buying spouse to equalize the property division, then lowering the sale price can be a way to pay that debt.

Spousal Support Considerations

The exiting spouse may agree to a lower price in order to avoid having to pay spousal support. For example, if the spouse that’s entitled to support (“supported spouse”) is buying out the paying spouse’s share of the house in order to stay there with the kids, the supported spouse might agree to give up spousal support if the paying spouse will convey his or her interest for a lower-than-market-value price. This could negate tax benefits that can sometimes accompany spousal support.

Refinancing Issues

A buyout is usually done in conjunction with refinancing the mortgage loan on your house. The spouse keeping the house usually applies for a mortgage loan in their name only. The spouse keeping the property takes out a large enough loan to repay the existing loan and to pay the exiting spouse what is owed for the equity buyout.

You and your spouse could have a mortgage loan for $150,000 with a principal balance equal to $150,000 and equity equal to $150,000 in your home. A loan of at least $225,000 is required if you want to buy out your spouse’s share of the equity. To become sole owner of the house, you would first pay $150,000 to repay the original loan. Then, you would pay $75,000 cash ($half the equity) to your spouse. Your spouse would sign a deed to transfer ownership to you and a title company would handle all paperwork and funds transfers.

Most likely, money and deeds will be transferred simultaneously at a closing with the title company. This is the best situation for you if you are the spouse exiting. Upon closing, the exiting spouse will be removed from title, the previous mortgage if applicable, and ownership of the home.

Refinance to get equity

I always recommend dividing the equity by refinancing their house and then dividing 50/50 if they are in a community-property state.

If you wish to keep your home, however, you need to get pre-approved for refinancing prior to the final divorce decree.  If your divorce states you must refinance within a given time frame, and you fail to do this, you will be in contempt of your decree and subject to additional legal action. This is where I can help. I am a certified divorce lending professional and have extensive knowledge in mortgages and divorcing. Do not accept the responsibility to retain the equity buyout and mortgage without first being prequalified. Start the process right away or give me a call at (214- 945-1066)

Refinancing removes the name of your spouse from the mortgage. This means that they will no longer be responsible for any payments. Refinance allows you to cash in equity and use it for the purchase of the spoused’s interest and responsibility.

Remember, the divorce decree only determines who will keep the home. If someone fails to make payments, the mortgage will determine who’s credit will be affected. This is why I would insist that a mortgage refinance be done as soon as possible.

If you own the house together, equity will be yours. You must pay both your spouses for equity when you purchase a house and the remaining debt. Keep in mind that your equity base will depend on where you live and whether you were married before. A divorce lawyer can help you to sort this out.

A mortgage assumption is another option. If the mortgage is an FHA mortgage, the spouse can assume it if they are eligible. The spouse who is leaving must pay cash. However, the terms of the assumed loan are not affected. Only the person responsible for the payment will be changed.

Texas is a Community Property State

The spouses share the majority of their assets, which means they will have to split the property at the end of the divorce proceedings. The court will decide which party is best suited to take over the house and pay the bills. If there are children from the marriage, they will also consider who is best able to do this. The court won’t reach for a big knife to split the house in half.

As we have already discussed, if one of the divorcing parties is able to pay the house bills alone, they can remain in the family home until finalization. It is possible to do anything when it comes down to the family. To minimize any disruptions to their lives, it is best for the children to stay with their families.

This occurs when one party agrees that the other half of $150,000 will be paid to keep the house. If the mortgage is $50,000 and the home is $200,000, each party still has $75,000 equity. If the spouse stays in the house, they must pay $75,000 (best with an Owelty Lien)  to the spouse leaving. In this case, the spouse will need to refinance their mortgage into an individual loan.

Texas also has very different cash-out laws which affect divorcing couples.  In the state of Texas, an Owelty Lien can be filed to enable divorcing individuals to enjoy lower mortgage rates and to be able to access the equity in the home all the way to 95% of the appraised value.  The vast majority of the lenders do not understand this procedure and will limit the equity division to 80% of the appraised value.  That is why it is important to work with an experienced Divorce Lending Professional like Richard Woodward.  He will make the process easier and less costly for you.  Read our blog post on Owelty Liens for more details. 

Clients have done everything they could to keep their marital home. One of our clients swapped 90% of his pension for future spousal support payments to preserve his marital home.

This is in keeping with my opening point of the blog post, which was that different people value their homes differently. One person may wish to ensure that their son stays in the home where he grew up. Home can provide a safe place for someone going through rapid change in their lives.

Although it is easy to transfer a home from joint ownership to sole ownership, there are some legal documents that must be completed and filed with the clerk in the locality where the home is located. An experienced family lawyer can help you transfer the house if you’re considering a divorce. The marital home must be sold if neither spouse wishes it. Proceeds from the sale will be divided according to court orders and consent.

As you can see, after the divorce has been finalized, one spouse may not be able to pay the mortgage payments. This is especially true for older divorcing spouses who have children and one spouse is not working.

It will almost be impossible for the couple to keep the house if they can’t stand being in the same place together. The two of them will have to come to an agreement on the best way to sell their house and what steps they should take. A family lawyer can help create a language that becomes a court order that includes guidelines for selling a house. These guidelines contain a timetable, instructions on how to pay the proceeds and how to divide the money.