What to Do With Your House in Divorce: Key Takeaways from Our Recent Webinar

By Divorce.com staff
Updated Aug 20, 2024

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Divorce is a complex process, and one of the most challenging aspects can be deciding what to do with the family home. Whether it's the emotional attachment, the financial implications, or legal complexities, figuring out the best course of action requires careful consideration and expert guidance.

In our recent webinar, "What to Do with Your House in Divorce," we delved into these complexities with the help of Angela Deaton, a Certified Divorce Lending Professional (CDLP) and Certified Divorce Financial Analyst (CDFA). Angela provided a comprehensive overview of the steps necessary to handle home ownership in the context of divorce, focusing on practical advice that can help you make informed decisions.

Understanding the Family Home in Divorce

For many couples, the family home represents the largest asset and liability in their marriage. As such, deciding its fate is a critical part of the divorce process. Common options include:

Selling the Home: The most straightforward approach, selling the home, involves using neutral realtors and appraisers to ensure fair market value and avoid disputes. However, it's essential to consider tax implications, such as capital gains tax, and how profits and liabilities will be split.
One Spouse Buying Out the Other: If one spouse wishes to keep the home, refinancing the mortgage to remove the other spouse is often necessary. While this can provide stability, it requires a deep understanding of the current mortgage situation and the financial capability to handle the refinancing.
Co-Owning the Home Temporarily: In some cases, divorcing couples may choose to co-own the home for a period, particularly if they have children. This option requires clear agreements on how the property will be managed and eventually sold.

Selling the Home: Key Considerations

Selling the home is often the simplest option, particularly when both parties are ready to move on. However, it’s important to:

Engage Neutral Professionals: Utilize neutral realtors and appraisers to get an unbiased valuation of the home.
Understand Tax Implications: Capital gains tax can significantly impact the final profit from the sale, so it’s vital to plan accordingly.
Agree on Profit Distribution: Make sure there's a clear agreement on how the proceeds and liabilities will be split to avoid future conflicts.

Keeping the Home: Refinancing and Mortgage Considerations

For those who wish to retain ownership, refinancing the mortgage is a crucial step. Key points include:

Pre-Approval is Essential: Obtain pre-approval for refinancing during the divorce negotiations to avoid complications later. This step ensures that the retaining spouse can manage the new mortgage terms.
Mortgage Assumptions: Though rare, mortgage assumptions can allow the retaining spouse to keep the existing low-interest rate, a significant financial advantage in a rising rate environment.

Financing Buyouts and Assumable Loans

Equity buyouts, where one spouse pays the other for their share of the home’s equity, are another common solution. Here’s what to keep in mind:

Refinancing Options: Buyouts can be financed through refinancing or a home equity line of credit (HELOC), but it’s essential to consider current interest rates and the terms of the loan.
Assumable Loans: If an assumable loan is in place, it can be beneficial for keeping the original loan terms. However, remember that these loans can't be increased to cover buyouts or closing costs.
Using an Owelty Lien: An owelty lien can be an effective tool in situations where a spouse needs to buy out the other’s equity without taking cash out during refinancing. This method helps avoid higher interest rates or fees while ensuring the buyout is completed fairly.

Income Considerations for Refinancing

When it comes to refinancing, income is a critical factor. Divorce-related income sources such as alimony and child support can be used to qualify for loans if they meet specific criteria:

Alimony and Child Support: These can count as income if they are expected to continue for at least three years and have been consistently received for six months for conventional loans.
Trust Distributions and IRA Withdrawals: These can also be used as income for refinancing but must be carefully planned to avoid penalties and taxes.

Final Thoughts

Divorce is a life-altering process, and the decisions you make about your home can have long-lasting financial implications. Whether you’re considering selling, refinancing, or buying out your spouse, it’s crucial to understand all your options and plan carefully.

Navigating the complexities of home ownership during divorce may seem daunting, but with the right information and professional support, you can approach the process with confidence and clarity.

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