In a divorce, the family home must be divided just like any other asset: Either you and your spouse will reach an agreement or the court will issue an order about what will happen to the home when the divorce is final. But, unlike many other assets, the disposition of the family home can raise complicated emotions and challenges—especially when there are children who live in the home.
Ultimately, upon divorce, the spouses will most likely:
Here's what you need to know if you're considering a buyout of the family home as part of your divorce.
Selling the house and splitting the proceeds is often the simplest, cleanest way to deal with the family house after a divorce. However, a buyout—where, in exchange for something of value, one spouse retains the house and the other is removed from the title and mortgage—is a better option in some circumstances when the spouses can agree on the terms. (In the absence of an agreement, most courts will simply order the couple to sell the home.)
A buyout is often a good option when the couple has children that live in the house. Courts and most parents recognize that arranging a way for the children to stay in the house after the divorce can provide continuity and stability. For this reason, the spouses might agree that one spouse (usually the custodial parent) will buy out the other's interest in the family home so that the children won't have to move.
Even when a couple doesn't have children, there might be reasons why a buyout would be a better option than a sale. For example, a spouse who has ample financial resources might want to keep the family home to avoid having to sell in a bad market, or to gain further appreciation in a seller's market.
A buyout can occur over time, with both spouses keeping an interest in the house for a while. All details about a gradual buyout would need to be included in your settlement agreement or the divorce decree. More often, though, the buyout is completed as part of finalizing the divorce.
In all buyouts, each party bears some risk. For example, the selling spouse might lose out on future appreciation, and the buying spouse might end up feeling the price was too high if the property depreciates in the future. And buyouts often aren't as simple as one spouse writing the other a check: It's not uncommon for a buyout to be a financial stretch for the buyer, especially considering their financial status as a newly single person.
Homesellers often rely on the advice of their real estate agent to set the sales price for their home. In a divorce buyout, though, you probably won't be working with an agent, so you'll have to use another method to determine the fair market value of the property. If you've recently had the house appraised, or if you and your spouse have similar ideas about its value to begin with, you might not have to fuss too much about this.
But, if you and your spouse can't agree, or you want a bit more information, you can ask a real estate agent to provide information about recent sale prices in your neighborhood for houses comparable to yours (these are often called "comps"). You can also do your own research online using estimates from sites such as Zillow or Trulia (beware that the home value estimates these sites provide can vary and fluctuate based on factors that might not apply to your home).
Another popular—and dependable—way to determine value is to hire a professional property appraiser. This will be more expensive—probably $300 to $800 for a formal appraisal and report —but if you disagree about the house's value, it's a good way to settle the question. If the appraisal doesn't work, you'll have to head to court and ask a judge to decide the value of the home. The judge will likely rely on the appraiser's report, or if there are two appraisals, a judge may use the average of the two.
Once you've agreed on the fair market value for purposes of a buyout, you may decide to adjust it, for any of a variety of reasons. Common negotiation points include:
If you're planning to buy out your spouse's interest in the family home, you have some options if you don't have funds on hand to simply write your spouse a check.
In lieu of a cash payment, it's common for the buying spouse to trade other marital property worth about as much as the selling spouse's share. For example, one spouse might keep the house in exchange for giving up their share of marital investments and retirement accounts.
Although this method will result in a balance of both spouse's allotments of marital property, it can pose a problem if there's a mortgage on the property. Transferring the title of the house into only one spouse's name (either by quitclaim deed or another form of deed recognized by the state) won't remove the other spouse from the mortgage. This means that the selling spouse would still be on the hook to the lender if the buying spouse fails to make payments on the house.
So, even if you and your spouse agree to trade other marital assets to balance out one spouse getting to keep the family home, you'll still need to make sure that only the buying spouse's name remains on the mortgage after divorce.
In rare cases, your lender might allow you to release—remove—the selling spouse's name from the mortgage, so that the buying spouse assumes all responsibility for the loan. Most lenders aren't willing to do this, and those that do allow it will require proof that the assuming spouse has the financial ability to continue paying down the mortgage without support from the spouse.
The most common way to ensure that the house is in only one spouse's name is to refinance. Refinancing can also provide you with the funds you need to buyout your spouse's interest.
In most cases, a buyout goes hand in hand with a refinancing of the mortgage loan on the house. Usually, the buying spouse applies for a new mortgage loan in that spouse's name alone. The buying spouse takes out a big enough loan to pay off the previous loan and pay the selling spouse what's owed for the buyout (also called a "cashout refinance").
Here's an example of how you might calculate buying out your spouse's interest in your home.
You and your spouse have a mortgage loan with a principal balance of $150,000, and an equal amount of equity ($150,000) in your house. If you are buying out your spouse's half of the equity, you would need a loan for at least $225,000. You'd pay $150,000 to pay off the original loan, then pay $75,000 cash (half of the amount of equity) to your spouse to become the sole owner of the house.
The transaction would proceed just like a sale to a third party, with your spouse signing a deed transferring ownership of the property to you, and an escrow company taking care of most of the paperwork and transfers of funds.
Most likely, the transfer of deeds and money will happen all at the same time, at a "closing" with the escrow company. If you are the selling spouse, this is the best scenario for you. If there's not going to be a closing, make sure the refinance is completed and you've gotten your money before you sign a transfer deed.
If you're the buying spouse, make sure you complete a title search to make sure there are no liens (legal claims—for example, for back taxes) or other "clouds" on your title. The title company handling the closing should do this for you.
When interest rates are low, refinancing might not result in much of a change in the buyer's monthly payments (and if you can get a lower interest rate than you previously had, it might even lower your payments). However, when interest rates are high or rising rapidly, refinancing can turn a once-affordable monthly payment into an unaffordable burden that makes buying your spouse out of the family home impossible. Unfortunately, there often isn't much a divorcing couple can do to solve this problem; selling the house and dividing the proceeds might be the best option.
If you're facing high interest rates if you refinance, but strongly desire to remain in the family home (perhaps to allow your child to finish out the year in the same school district, for example), be sure to shop around to find the best refinancing rates. You could also consider:
If you're doing your divorce yourselves, the process of dividing an asset as large as the family home can be a daunting task. A home is often a couple's largest asset—or their biggest burden. No matter whether you have a lot of equity in the home or are underwater, consider consulting with a family law attorney to make sure you're not leaving any money on the table. A family law attorney can help you brainstorm ways to make the terms of the buyout satisfactory for both spouses, or help you find a knowledgeable real estate broker if you decide that a buyout isn't the right solution for your divorce settlement.