Selling a Marital Home During or After Divorce in 2019
Splitting assets is an unpleasant reality of divorce. For divorced couples or those going through a divorce, this guide will provide a better understanding of the challenges of splitting the marital home.
The guide offers a thorough explanation of what you will typically encounter when dividing a house. Solutions to common problems are explained in detail—providing you with the much-needed information necessary to get through the process.
All About Splitting a Matrimonial House During or After Divorce: How to Sell or Keep Your Marital Property
3 Ways to Sell Your House in or After Divorce
1) Sell Your Marital House to a Real Estate Investor
Who Are Real Estate Investors?
Real estate investors have a unique niche in the real estate market. They pay cash for homes in any condition, and the transaction is usually completed in only a few days. Because of legal problems or costly repairs, some property is difficult to sell with a real estate agent or through a FSBO sale. For a homeowner in a challenging situation, a real estate investor can be a lifesaver.
How to Find the Right Real Estate Investor
Be cautious when finding a real estate investor in your area. Anyone who thinks they can come up with the cash to buy a house can become an investor. Because investors have almost no regulations, it is a perfect business for people who want to take advantage of distressed sellers.
Look up the phrase “we buy houses for cash” online and pick a few local home buying companies from the search results. Go to a few review sites and read what customers write about them. Ask a few highly rated investors to make cash offers for your property and choose the best one.
To learn more about finding the right cash house buyer and not get scammed, read our detailed guide on selling your house to a real estate investor.
Advantages of Selling to a Real Estate Investor
A divorcing couple won't have to spend much time cooperating when selling to a real estate investor. Investors handle all possible property-related problems themselves.
If you are going through a divorce, you may have put off making some needed home repairs. Real estate investors buy houses in any condition. When you sell to an investor, you don't have to fix anything. An investor buys your house AS IS.
Selling the family home yourself or through a realtor can take weeks or even months. Investors do everything quickly. Typically, when you accept the investor's offer, the closing will be completed in a few days.
Investors eliminate the middlemen—from the time you request a cash offer to the closing:
- no dealing with a home inspector is necessary
- no loan officer has to approve their financing
- no contractors must be hired to do any repairs to the house
Investors also eliminate the time and money you would typically have to spend in a traditional real estate sale:
- they settle all claims against the house and take care of the associated paperwork
- they pay all the closing costs and complete any other paperwork related to the sale
Real estate investors buy homes with cash. After you meet with them, you will typically have a cash offer within 24 hours. And you won't be surprised with any hidden fees at closing. You will get the cash you agreed to with no unexpected out of pocket costs.
Disadvantages of Selling to a Real Estate Investor
Because investors pay cash for houses in any condition, they must buy those houses at discounted prices. When you get a cash offer from an investor, all of their expenses for fixing up and reselling your home are factored into the offer. Consequently, their offer will be lower than the market value of the property.
Legitimate real estate investors buy properties at reduced prices and sell them for a profit. But not all investors are legitimate:
- The investor may have no references—a likely indication of a scammer.
- The investor may offer you a contract that they can walk away from, but one that you can't get out of.
- The investor may make an offer that is too close to the market price of your house, and then manipulate you into selling it for a lower price.
- A foreign “investor” can say they are ready to buy a property without even visiting it, but in fact they need your personal information and money.
2) Sell with a Real Estate Agent
Who Are Real Estate Agents?
For a percentage of the final sales price, a real estate agent helps a homeowner sell their house. The realtor represents the homeowner throughout the entire real estate transaction. Real estate agents typically help homeowners by:
- Marketing the property.
- Showing the property to potential buyers.
- Negotiating with the buyer and the buyer's real estate agent.
- Assisting with the closing process.
How to Find the Right Realtor
Two of the essential qualities you will find in a good Realtor are a thorough knowledge of property values in your local real estate market and a good work ethic. Make a list of potential realtors by reading online reviews and asking for references from family and friends. Meet with three or four of the best candidates.
You can test a realtor's knowledge of property values by comparing the prices they think you should ask for your home. Do not use a realtor whose asking price is far different from the asking prices of the others (this indicates a poor knowledge of property values).
To help determine a realtor's work ethic, ask them how they plan to market your house. Ask for examples of the advertising they have used for other homes in your price range.
A good realtor helps you set a realistic asking price. You want to attract offers, but the price shouldn't be so low that you sell your house for less than it is worth.
Advantages of Selling with a Realtor
The more exposure your house has to buyers, the more likely you are to get the best price. Only real estate agents have access to the multiple listing system (MLS), which gives the property the highest exposure to potential buyers.
The right agent supports you throughout the entire process. You have professional guidance available to help with decisions and fewer chances to get into arguments with your former spouse because the realtor does most of the work.
You do not have to negotiate a final sales price directly with a potential buyer. The realtor does that for you by working directly with the buyer or the buyer's representative.
Disadvantages of Selling with a Realtor
An experienced agent will do a quick walk-through of your property—identifying any problems that would deter a buyer. If your house needs costly repairs, most realtors will ask you to make those repairs before they list the home.
One of the biggest problems of a traditional real estate sale is the time required. You have to wait for:
- The realtor's marketing to attract a buyer.
- A buyer's offer.
- The buyer's home inspection.
- Contractors to fix any problems.
- The title company's search and the other closing details.
You must pay the realtor a commission at closing, as well as the commission for the buyer’s Realtor if they are using one. Although closing cost estimates are relatively accurate, it is quite common to be surprised with hidden fees.
A realtor will have to show your house to sell it. While necessary, showings disrupt family life—especially if you have small children. Most realtors like to have open houses for their listings.
While open houses can attract potential buyers, they can also attract thieves. If the realtor can't sell your home before their contract ends, you may have to start the process all over again by hiring a different realtor.
3) Sell It Yourself
You are not required to have a real estate license to sell your own house. But it's the most difficult option because it requires so much of your time, energy, and money. With a FSBO (For Sale By Owner) sale, however, you have the potential to make the most money.
You don't have to do everything yourself. You can hire a real estate agent to provide you with limited services. For a lower commission, some agents will help you set an asking price, advertise, and assist with other services.
Online marketing websites can also help you with marketing. For example, Facebook and Craigslist are free, while others advertise for a fee.
Advantages of Selling on Your Own
If you want to have control of every aspect of the sale, a FSBO sale can be the right choice. You can control every aspect of the marketing process:
- You set the asking price.
- You make the marketing choices.
- You show the home.
- You negotiate with the buyer or the buyer's representative.
A FSBO sale can be quicker than a traditional sale, especially if you know any potential buyers. If you can find someone already interested in your property, you won't have to spend any time or money marketing your house. You only need to negotiate a selling price with the buyer and work together with the buyer to get the deal closed as quickly as possible.
The 6% commission typically charged by a real estate agent takes a big bite out of your profit. You can save all of this money if you don't use any of the services of a realtor. You save some of this commission even when hiring a realtor to help you with a few of the services that you don't want to do yourself.
If you are an excellent salesperson, you may be able to negotiate a higher price with a potential buyer than the average realtor could.
Disadvantages of Selling on Your Own
Divorce adds significant stress to daily life. Adding the pressure of a FSBO sale could be overwhelming, especially if your ex-partner disagrees with you on some of the aspects of marketing and selling your property.
It is challenging to set a realistic asking price. To sell the house yourself, you must not discourage potential buyers with an amount that is too high. Your asking price must also not be so low that you discount your house unnecessarily.
Since you’re not using a realtor, you have to decide which of the house’s problems might discourage a potential buyer. Because of this, you could end up spending time and money fixing things that don’t matter to a typical buyer. On the other hand, by not fixing items that would deter a buyer, your house could sit for months without an offer.
A FSBO sale can take more time to get an offer than selling a house with a real estate agent, and especially than selling it to a property investor.
If the housing market is slow in your area, a realtor can sometimes net you more money than you could get with a FSBO sale.
Do I Always Have to Sell My House if I Divorce?
As long as the husband and wife are in agreement, the divorce can be finalized without selling the family home. For example:
- The couple can retain joint ownership of the house.
- One spouse can buy out the other’s share of the property.
- One spouse can give their share to the other spouse.
Couples can usually divide the real estate and other assets as they choose in a divorce property settlement agreement. But when a couple can’t come to an agreement, a judge can force a sale of the marital home against the will of one or both of the spouses.
Divorce Property Settlement
What Is Divorce Property Settlement?
Legally speaking, married couples either own property together or own property separately. Practically speaking, who owns what becomes significant when one spouse dies or when the couple divorces.
A divorce property settlement is a binding legal agreement describing the division of assets owned together. If not written by legal counsel, it should be reviewed by each spouse’s lawyer. A separated or divorced couple who draws up their own settlement can be too vague in their wording, which may cause problems when the assets are actually divided. Most states have statutes requiring a detailed division of assets—hence the need for an attorney.
The divorce property settlement is usually a part of the broader divorce agreement. The divorce agreement is meant to resolve every divorce-related issue, such as the custody of children.
What Is the Time Limit on Property Settlement?
How long after a divorce property settlement can a suit be filed against a former spouse for the divorce agreement enforcement? Each state has its own time limit, which generally corresponds to the individual state’s statute of limitations for civil actions. (This can be confusing in a state such as Mississippi, where the statute of limitations for domestic judgments is seven years, but three years for other civil actions.) The time limit, however, does not necessarily begin when the settlement is finalized.
For example, an ex-wife is awarded full ownership of the marital home in Mississippi. She agrees to take no child support from the ex-husband in exchange for his agreement to pay the mortgage and property taxes. Since Mississippi’s statute of limitations is seven years, the ex-husband determines that he can stop the payments after the seven years and be legally free to break the settlement agreement. What he does not realize is that the seven-year time limit doesn’t begin in Mississippi until the first breach of the settlement—not the initial date of the settlement.
In contested divorces, people can be very creative in ways to defraud each other. Seek legal counsel at the first sign of a breach of the property settlement agreement. Do not wait!
Should I Keep the House or Sell It if I Divorce?
How to Determine the Equity in a Home for a Divorce Settlement
What Is Equity?
Equity of an asset is its fair market value minus any liabilities such as loan payments. In a marital house, the equity is determined by subtracting the mortgage balance, secondary loan balances, and any other outstanding bills connected to the house from the fair market value of the property.
A division of assets cannot occur without calculating the equity in each of those assets.
How to Calculate Equity
Don’t guess at the home’s fair market value. Get the house appraised. It is preferable to have the house appraised by at least two experienced appraisers in your area. If the appraisals are not similar, hire a third appraiser.
Once the home is correctly valued, put together a list of all the financial obligations that are tied to the house, such as:
- Any mortgage balance.
- Any secondary loan balances.
- Any outstanding taxes.
- Any outstanding utility bills.
- Any outstanding insurance premiums.
To calculate your equity in the home, subtract all the financial obligations associated with the house from the home’s fair market value.
Getting the House Appraised for Divorce Settlement
Get a professional appraisal to determine the marital home’s value. Do not trust your own estimate, and do not accept the estimate of your spouse.
In uncontested divorce proceedings, a judge might not require a professional appraisal. But couples should not try to save money by valuing the house themselves. One of them could get shortchanged in the property settlement.
In an uncontested divorce the couple can split the cost of a single appraisal (although two or more are preferable). Normally, a judge will require an appraisal to be less than 6 months old to approve it .
In a contested divorce, an accurate appraisal is critical. Because there is no goodwill between the two parties, each spouse is looking for an opportunity to take advantage of the other. Each party should ask their attorney to recommend an appraiser. In looking at the two valuations, a judge can determine the market value of the home.
What if One Spouse Owned the House Before the Marriage?
If one spouse owned the house before the marriage, the market value of the home at the time of the marriage becomes essential.
As an example, at the time of their marriage, a husband moves into the house that his wife has owned for several years. The wife had just refinanced the home, and it was appraised at $250,000. The couple has a joint bank account from which the mortgage payments are made. After ten years of marriage, the couple decides to split. At that time the house is worth $410,000. Because of the husband’s contribution to the house’s current value, the equity in the $410,000 asset may be considered both marital property and separate property belonging to the wife.
If no appraisal at the time of marriage is available, reviewing property tax documents and real estate listings from that date can help determine the valuation.
How Is Home Equity Split in a Divorce?
Splitting home equity in a divorce is a complicated process that involves much more than the house. It would be a mistake, for example, to assume that just because the wife owned the home before the marriage, she will get all of the equity.
Other issues affect the division of equity:
- Home improvements paid for with joint income.
- Mortgage payments paid for with joint income.
- DIY projects which significantly added to the value of the house (such a converting a garage into living space).
- Capital gains taxes.
- Laws of your state.
Who actually gets what portion of the home equity is determined by considering all assets as a whole (together with vehicles, cash and any other type of property) before dividing any property. For example, a couple can settle on leaving the house to the wife while the husband takes all remaining assets.
Community Property States
In a community property state, property held in common is divided equally.
For couples who bought their first house together and filed joint tax returns, the division of the equity is straightforward. But certain conditions complicate the calculation. Some examples:
- A prenuptial agreement generally has legal precedence over the community property law.
- When the home was already entitled to one spouse before the marriage, the value of the house at marriage will be excluded from the community property calculation.
- For couples filing separate tax returns, a vacation home paid for with money earned by one spouse in a common law state is excluded from the community property calculation.
There are nine community property states:
- New Mexico
In Alaska couples can make their property community property by mutual agreement.
Common Law (Non-Community Property) States
The remaining states are common law states (also referred to as non-community and equitable distribution states). Dividing home equity in these states is a more complicated calculation because marital property is not always split 50/50.
Equitable distribution takes into account the separate property as well as the marital property. The court only divides the marital property, but the value of the separate property affects the calculation.
A wife, for example, owns several commercial properties before the marriage. After the marriage, the wife maintains her very lucrative property management income, and the husband takes care of their small children. When they divorce after the kids are grown, the court allocates more of the marital property to the husband. He is considered disadvantaged from acquiring separate property because he stayed home and cared for the children.
What to Do if a Matrimonial House Has no Equity
If more money is owed on the family home than it’s worth, there’s no equity to divide. One option is to sell the house and divide the remaining debt as a part of the divorce property settlement.
Another option is for one party to relinquish ownership of the house to the ex-spouse in exchange for nothing. The home is then treated as a zero asset. This is not usually a financially viable option unless the ex-spouse has had a substantial increase in income, sufficient to continue to pay the mortgage. Otherwise, the house must be refinanced for a longer term and lower payments.
One party can also relinquish ownership to the ex-spouse and assume half of the negative equity. This option might not prove to be fair to the party relinquishing ownership if the house appreciates significantly over the next few years.
Just make sure that both spouses’ names don’t remain on the mortgage. (This usually means refinancing the home.) If the spouse relinquishing the home leaves their name on the mortgage, they will continue to be responsible for any unpaid mortgage payments, which will affect their credit.
House Equity Buyout
The marital home does not have to be sold in order to divide the equity. One spouse may wish to stay in the family home after the divorce—to keep the children in the same school district, for example.
When the equity in the home is calculated by the court, one spouse can buy out the other spouse’s portion. This is called a house equity buyout.
The spouse who keeps the house must be able to afford it. For example, this can be difficult for the stay-at-home parent who must suddenly replace much of the other spouse’s income. Not only do the existing mortgage payments have to be paid, but also the other spouse’s equity has to be paid. In such cases, other assets in the property settlement can be traded for the equity owed.
Without refinancing the home, both parties continue to be legally responsible for the mortgage payments. An ex-spouse typically does not want to be responsible for a mortgage on a house that isn’t theirs. In this case, it is better to sell the house, if refinancing is not affordable to the party that wants to keep it.
Should I Sell the House Before or After Divorce?
Pros and Cons of Selling the House During Divorce (Before the Settlement)
Most divorce attorneys and accountants recommend selling the marital home before the divorce is final. Understand the pros and cons of selling before the settlement so you can determine what is in your best interest.
While the division of a house in a divorce is not taxable, the gain from the sale of a home is subject to capital gains tax (this will be discussed in greater detail later in the guide.) The capital gains exclusion for the marital home is $500,000 for married couples. It can be a tax advantage for some couples to delay the divorce until the following year after the sale of the house.
It is easier to have cash home equity in hand when dividing assets rather than having to speculate as to what the equity will be after the sale.
Divorce records are public records. Selling before finalizing the divorce keeps private details out of the public's hands.
Child custody cases can have overwhelming legal costs. The proceeds from a sale can help pay these bills.
But there are some disadvantages when selling during the divorce:
- Any children in the home might have to leave their school and give up their extracurricular activities if the sale occurs during the school year.
- Maintaining the home can put a strain on the finances of the spouse who is keeping the house.
- There's a narrow window of time to sell a house during the divorce proceedings. If you live in an area where the real estate market is seasonal, the sale could come at a time when the market is at its lowest.
Pros and Cons of Selling the House After Divorce
It's rare to find a divorcing couple able to live separately in the same house. But sharing the property until after finalizing the divorce agreement can reduce the expenses of maintaining two separate households.
For the spouse with majority custody, staying in the home can be helpful for the children. They have familiar surroundings at a time when their family life is coming apart.
In a community property state, a couple can usually divide the house equally if the house is entirely marital property. In such a case, the stress of a real estate sale can be delayed until after the divorce.
But if the home equity is subject to equitable distribution, no accurate number can be available until the house sells. It's challenging to prepare a property settlement when using an estimated value for an asset as significant as the family home.
And delaying the sale of the home gives couples in a contested divorce one more issue to fight about.
When an Ex-Partner Refuses to Sell the House
Can an Ex-Spouse Force the Sale of the Family Home?
Force Sale of the House During Divorce
In an uncontested divorce, the couple generally has full control over what is done with the matrimonial home. But during a contested divorce, emotions can make any negotiations between the spouses almost impossible.
For example, a wife may consider the house as her dream house and refuse to move. The land the home was built on could have been in her family for generations. Or she could have designed and decorated the house in a way she considers irreplaceable. She might say to her lawyer, “He can have everything else. But he’s not getting the house.”
The husband, however, may view the house and the land as his worst nightmare. He may not consider “everything else” to be worth as much as his part of the property. And he might be equally stubborn.
If the parties refuse to agree, a trial is required. And a court ordered sale can be issued.
The court can also sell a property without consent if the property is in danger of foreclosure because of unpaid liabilities. In this case, the court wants to preserve any equity in the home for the benefit of the separated couple.
A spouse can file, for any reason, a partition lawsuit during the divorce to force a sale. Partition lawsuits, however, tend to be very expensive, which eliminates most of the frivolous ones. But the court must still agree with the plaintiff before a forced sale will be issued.
Force Sale of the House After Divorce
A spouse can also file a partition lawsuit after the divorce to force a sale. Again, the suit can be filed for any reason, but the court must agree to consider the complaint.
As an example, your ex-spouse was granted ownership of the family home but fell behind on the mortgage payments. You are still listed as a co-borrower on the mortgage, and the lender comes after you for payment. Since the divorce property settlement required your ex-spouse to stay current on all payments, you bring a partition lawsuit against them. Because you can’t get your name off a mortgage after divorce without a loan modification or a refinance, the court may order a forced sale.
Unless one of the parties brings a complaint to the court, the court would have little way of knowing of any settlement violation. So after a divorce has been finalized, it is unlikely for the court to initiate a forced sale.
Can an Ex-Spouse Sell a House Without a Permission of the Other Ex-Spouse?
Even if you are the sole person on the deed, it is usually a bad idea to sell the marital house during a divorce. Judges don't usually like this type of concealment. And even if you are successful in completing the sale, the judge may seek justice for your spouse when other assets are divided.
But the rules are different after finalizing the divorce. For example, what should you do if the property settlement gives you the house, but your ex-spouse won't move out?
There is a way to avoid the expense of a partition lawsuit.
If you can't get your ex-spouse to agree to the sale of your home, check the deed to the property to see your options:
- If you and your ex-spouse hold title as joint tenants, you cannot even list the house for sale without their consent.
- If you own the house as tenants in common, you can sell your half without their permission (although this would not be practical unless the house is a duplex).
- If the house is deeded in your name only (even in a community property state), you can sell the property without the signature of the ex-spouse.
Taxes on Selling a House During or After a Divorce
Please note: this guide can only give you general tax information about the sale of a principal residence during or after a divorce. Consult with an accountant before making any decisions.
Generally speaking, the sales price of a house minus the property’s basis is subject to the capital gains tax. (The actual calculation is not that simple. The basis is adjusted by other factors, which your accountant can provide.)
If a couple remains married during the year the home is sold, they can claim up to a $500,000 exemption from capital gains taxes. If the home is sold after the divorce, the exemption is $250,000 per spouse. The exemption only applies to the primary residence (not a vacation house). And each person must have lived at least two of the last five years in the home. If the home was not owned for at least two years, the exemption is reduced.
When the home is sold:
- while the couple is still married, the $500,000 exemption applies.
- after the divorce, the $250,000 exemption applies to each ex-spouse.
- to one of the ex-spouses, it is not a taxable event for either person.
A divorced couple may choose to keep the family home until all the children graduate from high school, for example. Instead of shuffling the children back and forth, the parents might share custody by taking turns living in the house with the children. While this is expensive for the parents (and unusual), it provides a more stable environment for the kids. Whatever the arrangement, as long as the family home is treated as the primary residence, each parent can take the $250,000 deduction whenever they sell the house.
The sale of rental property to a third party is a taxable event (regarding capital gains). It is not a taxable event when one spouse sells their portion to the other.
Divorce and Mortgage Questions
What Happens to a Joint Mortgage and Who Pays It?
A common misconception in divorce is that the spouse who is removed from the deed to the property thinks they are automatically removed from the mortgage contract as well.
Lenders usually have no problem removing an ex-spouse from the deed. But banks don’t want to remove an ex-spouse from the mortgage agreement. A bank has no incentive to remove a guarantor who is divorced but still on the note.
A good lawyer will advise you of this fact during the divorce property settlement negotiations. But in a DIY divorce, this reality can be overlooked. The ex-partner has a legal responsibility to pay half the mortgage until the house is sold to a third party, or until the divorced couple agrees to another arrangement.
If you are losing your ownership of the house to your ex-spouse, you have very few options to get your name removed from the mortgage agreement:
- The ex-spouse can refinance the home if they can qualify for a new loan on their own.
- The ex-spouse can get a loan assumption, providing they have enough assets to convince the bank that the note is secure.
- The house can be sold to a third party who will need to refinance the mortgage in their name.
- The house can be sold to a real estate investor who will pay any outstanding mortgage amount with cash (the simplest and quickest option).
What Are the Consequences of not Paying the Mortgage During or After Divorce?
Divorce is emotionally and financially traumatic for most couples. And when people feel like their emotional and financial world just fell apart, sound decisions are difficult to make.
Your ex-spouse may have agreed to pay your mortgage payments until all your children graduate from high school. But what happens if they stop paying the mortgage because they decide they got a raw deal or if something happens to them?
No divorce agreement can remove either party from a mortgage agreement. So if you were on the mortgage while you were married, you are still on the hook for making the payments. The bank will come after both you and your ex-spouse for delinquent payments.
If you don’t want to lose the house to foreclosure, you must negotiate a resolution with the bank. After relations have been restored with the bank, you will have to sue your ex-spouse for violation of your divorce agreement.
What Happens if the Mortgage Is in My Name Only?
If you live in a community property state, did you purchase the home before the marriage? Is the deed to the property in your name only? If so, your ex-spouse will most likely have no claim to any portion of the home. But if you bought the house during the marriage, your ex-spouse will be considered a co-owner even if their name is not on the deed or the mortgage.
In non-community property states, your ex-spouse may be granted some ownership of a house even if you bought it prior to the marriage. For example, the deed and the mortgage may be in your name only, but the ex-spouse can claim:
- Contribution to mortgage payments (directly or indirectly).
- A disproportionately smaller amount of assets.
In this manner, the ex-spouse could be granted a share of the ownership in a non-community property state. And your name would remain on the mortgage.
You could find yourself in a position of losing most or all ownership of the family home, but having full responsibility for making the mortgage payments. It is unwise to be financially responsible for something you can’t fully control. So make sure the divorce settlement requires the ex-spouse to refinance or assume the loan. And if that’s not possible, request that the house be sold.
Removing a Spouse or Yourself from a Mortgage After Divorce
Why You Shouldn’t Keep Your Name on the Mortgage After Divorce if You Don’t Keep the House
It is inadvisable when both spouses are on the mortgage, but only one spouse is on the deed. The spouse who lost the house is financially responsible for something they have no control over. If their name is still on the mortgage they can be liable for:
- Overdue house payments.
- Delinquent taxes.
- House maintenance.
- Damage to the personal property of others.
- Bodily injury to visitors on the property.
The ex-spouse who has ownership should take over the mortgage. But it's not easy to get a bank to take a name off a mortgage. Removing one borrower from a mortgage puts the bank in a weaker position. The bank has only one income to provide payment, and only one borrower to hold liable.
Assuming a Mortgage Loan
Would the interest rate for a new loan be lower than the interest rate on the existing loan? Is there any other compelling reason to refinance? If not, see if the existing mortgage can be assumed.
Conventional loans are not usually assumable. Ask your lender if your current loan has an assumable mortgage clause. Typically, only three types of loans have this clause:
- FHA loans (insured by the Federal Housing Administration).
- USDA loans (issued by the United States Rural Development Guaranteed Housing Loan Program).
- VA loans (guaranteed by the United States Department of Veterans Affairs).
If you have one of these types of mortgages, assumption is not guaranteed. The person assuming the loan still has to qualify.
Please note: don't presume that you or your ex-spouse is automatically removed from any financial liability if either of you assume the existing mortgage. If the lender doesn't release the original borrower from all liability for the original mortgage, that borrower could still be on the hook if the assumptor defaults.
Mortgage Buyout and Refinancing
A mortgage buyout happens when one owner of a house buys out the other owner's equity. First, a mortgage payoff amount is requested from the lender. This payoff amount is subtracted from a recent appraisal (acceptable to both parties), which represents the joint equity. The buyer then pays the seller for their equity in the house and pays the lender the mortgage payoff.
The buyer essentially buys the home for the appraised value minus the buyer's equity. This usually requires refinancing—getting another loan to pay the lender and the ex-spouse, but this new loan is now only in the name of the spouse who is keeping the house.
For example, in a house with a $250,000 appraised value and a mortgage payoff of $100,000, the joint equity would be $150,000. If the house is split 50/50, the buyer would pay $175,000 for the property (the joint equity divided by two plus the mortgage payoff). The buyer has to qualify for this loan. But as long as the joint equity minus the seller's equity minus the mortgage payoff is less than 80% of the appraised value, the buyer should be able to refinance the mortgage.
What if My Ex Refuses to Assume or Refinance the House?
If the party who keeps the house can’t or won’t assume or refinance the loan, the other party can initiate a lawsuit. The court will decide whether to force a sale.
Divorce and Foreclosure Questions
Can the Lender Initiate Foreclosure Due to Divorce?
According to the Garn-St. Germain Depository Act of 1982, a lender cannot initiate foreclose against homeowners because of divorce. If, however, the terms of the mortgage are violated for other reasons (such as delinquent payments), the lender can initiate foreclosure proceedings. So make sure mortgage payments are kept current—even if the other party refuses to cooperate.
Can Divorce Stop Foreclosure?
If the bank has initiated foreclosure proceedings before a couple files for divorce, the foreclosure proceedings will continue. A foreclosure in process can’t be stopped with a divorce filing.
How Can I Stop Foreclosure While Divorcing?
The stress of divorce sometimes causes responsible people to act irresponsibly. As an example:
Fred moved out of the marital home months ago. When he finally decided on divorce, Fred found out that his ex let the house go into foreclosure because she had refused to make the mortgage payments. Since Fred was also on the mortgage, the bank should have notified him of the delinquent payments. But he had been so distressed by the prospect of divorce that he hadn't paid much attention to his mail.
Filing for divorce could have given him some extra time to work things out with the bank (since they're prohibited by law from initiating foreclosure proceedings because of divorce.) But they had already begun the foreclosure process. And he now has both foreclosure and divorce to deal with.
In you are interested, we have a comprehensive and detailed guide on how to stop foreclosure at the last minute, but here are two most common ways explained right here:
If you are in a situation similar to the above illustration, avoidance will only make matters worse. Go to the lender immediately and see if you can negotiate a short sale. The bank can put a hold on the foreclosure proceedings if they see a benefit.
A short sale occurs when a house is sold for less than the amount owed. The lender agrees to accept a discounted payoff and may or may not release the seller from the mortgage. The seller agrees to accept a discounted price from the buyer.
A lender who has already initiated foreclosure proceedings won't usually be willing to wait weeks for a buyer. You must act quickly to get the house listed with a real estate agent.
It might be a better choice to get three or four cash offers from reputable real estate investors and take the highest offer to the bank for approval. A real estate investor will pay cash for your house, which could help in your negotiation with the bank.
If the bank accepts a short sale in place of a foreclosure, the negative equity from the sale of the marital home can be factored into the divorce decree.
Filing for Bankruptcy
If the lender does not approve a short sale, the only other way to stop a foreclosure already in progress is to declare bankruptcy.
When a couple files a petition for Chapter 13 bankruptcy, an automatic stay against foreclosure proceedings is typically issued by the court.
While it appears that a combination of bankruptcy, divorce, and foreclosure would be unbearable, the bankruptcy petition can give a couple some breathing room. The divorcing couple typically has fifteen days to file a repayment plan.
A Chapter 13 filing can also affect the property settlement agreement. The court has the authority to discharge debt related to the settlement, as long as it is not domestic support.
Dividing a Rental Property in Divorce Situation
If you and your spouse own rental property, keep rental income and expenses in a completely separate account. To avoid confusion when preparing the property settlement, do not use rental property income during divorce proceedings for personal use.
First of all, decide if you and your spouse both want to keep the rental property. In a contested divorce this can be difficult (unless the rentals are duplexes, which can be divided easily.)
When both spouses want to keep the rental property, a business arrangement should be set up. Again, this will probably only work in an amicable divorce. But if a 50/50 (or some other ratio) partnership is formed, only the deeds and titles need to be changed. Any mortgages can remain intact—saving both parties from the costs and associated stress of refinancing.
If the couple has multiple rentals, the properties can also be appraised and divided when sharing the other marital property. And both parties can keep separate rentals.
In a contested divorce with a single rental unit, the property should be sold to a third party or bought by either spouse.
If only one spouse wants to keep the rental property, they can buy out the other's equity or trade for it with marital assets.
Rental property has different tax implications from the primary residence: a capital gains tax must be paid. Otherwise, rental property is treated like the primary residence in the property settlement.