Divorce can be a very emotional time, and parties wonder about the financial impact of divorce. Arguably one of the couple’s most significant assets is their home and possibly a vacation home. So, we are often asked about home ownership during the divorce process.
Is a house community property?
According to Forbes.com, When a couple divorces, each spouse generally gets to keep their separate property. This is property they brought into the marriage and kept separate during the time they were married.
Say, for example, a spouse owned a house before marriage. If they never changed the title, did not get a joint mortgage with their spouse, and the spouse never contributed money or sweat equity to the house, then the house would likely be considered separate property, and the first spouse would get to keep it.
In most cases, though, that’s not what happens. If a couple buys a house together after getting married, it is considered marital property. And if one person owns the house going in, but the other works on fixing it up or contributes to mortgage payments, then the house can become joint or marital property that must be divided up in a divorce.
What does Equitable Distribution mean?
Equitable distribution simply means fairly divided. It is a principle in divorce law governing the allocation of marital property between spouses. In states that use equitable distribution, courts try to achieve a fair percentage of property based on a list of factors or guidelines set forth by state law. The equitable distribution of marital property is distinct from an equal (i.e., 50-50) division of marital property, which is generally used in community property states.
Am I entitled to half the equity in the house? As explained here, if it is considered a marital asset, each spouse is entitled to 50%. Consult with your divorce mediator or divorce attorney to understand your state laws.
Do Community Property Rules or Equitable Distribution Rules Apply?
If the court is asked to decide on the issue of who gets the house in a divorce, then the state’s rules can impact this decision. Different states apply different sets of guidelines regarding the division of marital property. The two approaches are:
Community property: In community property states, marital property is divided 50/50. So, if one spouse gets the house with $20,000 of equity, the other spouse would need to get an extra $10,000 in other marital property (to account for their half of the equity).
Equitable distribution: In these states, marital property is divided fairly but not necessarily equally. One spouse might be awarded the house while the other spouse receives other property slightly less in value if there is an income disparity between them.
Determining the home’s value and the amount of equity in the house is necessary to determine the buy-out amount, or the amount of money or other marital property you might have to give up to your spouse to be able to keep the house.
How to keep the house in a divorce.
During a divorce, the house, the question of residency, and ownership take center stage. A home is a significant investment and financial responsibility- can you afford the house on your own? Homelight.com shares a quick list of steps to determine if you can afford to keep your house during a divorce:
- Evaluate your finances. Keeping a house when you cannot afford it is a common mistake people make when getting a divorce. People do not anticipate the actual cost of owning and maintaining a home. Sacrifices may have to be made to afford the house, including the impact of capital gains taxes, other items you may need to exchange for taking over the home, and the responsibility of maintenance and associated expenses.
- Figure out the best way to pay for it. There are a few ways to pay for the home post-divorce. You could buy out your ex’s equity with your assets or try a cash-out refinance, which would release your ex’s equity and allow you to remortgage it, along with the remainder of the mortgage. Of course, you’ll need to qualify for the mortgage on your own.
- Determine the value of the home. Look at comparable sales or house comps. It is a process of aggregating and analyzing similar, recently sold houses. Comps are a crucial tool in adequately evaluating your home’s worth. Do not skip this step.
Living arrangements during a divorce
Living arrangements can be tricky, and some families can get creative. Economic issues and concerns can drive the decision-making process, with some childless couples opting to continue to live together as roommates. Should children be involved, cohabitating can give stability, and similar options assume the divorce is mutual and cordial. In amicable situations, couples can work through the process and determine boundaries and rules for living together. Working out the most favorable options for everyone with a divorce mediator or attorney is best.
Investopedia shares this tip: Sort out the separation details. Some couples live together until the divorce is final, but one spouse or the other usually moves out before that time. Decide where you, your partner, and your children will live. Keep in mind that maintaining two separate homes is expensive. Both you and your soon-to-be ex should aim to spend no more than 25% of your respective take-home pay on rent or mortgage costs. Be sure to create a realistic budget that reflects the new living arrangements and ensures both households are safe.
In our experience, sometimes, our clients actually continue to co-own a house after the divorce is finalized. Their names remain on the deed, and one person stays in the home. The person who stays in the home is generally responsible for living expenses. However, both parties may contribute to any “improvements” since this will increase the value. Then when children are older, or a date is agreed to, the parties sell the home and split the equity 50-50, or whatever arrangement they may determine.
Can you buy a house while going through a divorce?
The short answer is yes, you can buy a house while going through a divorce. The process can be challenging, and it helps if both parties know the intent to purchase a home and are willing to cooperate. There are many legal and financial issues to take into consideration.
- If the home is purchased during a divorce and the opposing party does not sign away their right to ownership, the court may view it as an asset during the divorce. Such a significant investment may also affect how the court splits assets and debt. This can drastically decrease the amount awarded to you and impact your financial future. (com)
- If you buy a house, the new home may be required to have both party’s names on the deed depending on state requirements since, technically, you are still married. This may cause a problem for the party trying to purchase before the divorce is final. (com)
- The first thing a bank looks at is a person’s “debt to income ratio” when applying for a mortgage. Usually, both parties will be guarantors on the marital home’s mortgage, so it may be tough to get a second home, assuming debt to income is not adequate.
It is best to discuss your intention to purchase a home with your spouse and a divorce mediator or attorney during the divorce process.
Divorce Mediation can help with house and asset division
Divorce mediation is an amicable solution for couples and families to meet in a neutral and cooperative setting. Safer Divorce empowers both parties through a collaborative decision-making process, resulting in better communication between couples and reduced time for agreeable resolutions. Let us help you navigate the process of selling or keeping your home during a divorce. Contact us, spend a few minutes talking about your situation, and see how mediation can be a more than viable alternative to litigated divorce.