Refinancing the Mortgage

If you’re going through a divorce and want to keep the family home, you will likely have to buy-out your spouse by paying an amount equal to his or her interest in the home.

For example, you and your spouse own a house valued at $300,000, subject to a mortgage with an outstanding balance of $200,000. Under this scenario, the equity in the house is $100,000. If you and your spouse split the assets 50-50, you would each have $50,000 of equity. If you want to keep the home after the divorce, you will have to pay your spouse a 50% share, or $50,000, to buy him (or her) out. Note that not all couples split their equity 50-50.

Unless you have a large pile of cash sitting around that you can use to buy your spouse out out, or you have other assets you can give your spouse in exchange for his (or her) share of the home, (for example, retirement funds), you will need to find an alternative.

A common way for divorcing spouses to accomplish a buy-out is to refinance the home (making sure the new loan is in buying spouse’s name alone), and take out enough cash from the home equity to pay the non-buying spouse his or her share. Once that’s done, the home must also be transferred into the buying spouse’s name alone.

Your first step is to figure out your share of the “equity” in the home. Home equity is created when the value of your home increases and/or when you reduce the amount you owe on your home through your loan payments.

In order to determine the amount of equity – or ownership – you have in your home, you must:

  1. Value the house;
  2. Subtract the outstanding mortgage balance; and
  3. Calculate your share of the remaining equity.

When one spouse wants the house, he or she can assume the mortgage. This means that proving he or she has the means to pay the loan and takes over the sole responsibility for the mortgage.

While most home mortgages have a due on sale clause, one spouse can still transfer the property and assign the mortgage entirely to the other spouse without the lender’s consent because of the 1982 Garn-St. Germain Act, which prohibits lenders from enforcing the due on sale clause if a mortgage or the property is transferred as a result of a divorce decree, legal separation agreement, or a property settlement agreement (even if the mortgage is in default) (12 U.S.C. § 1701j-3(d)).

A due on sale clause states that upon a sale or conveyance of the property the entire balance of the loan must be repaid. If there is a due on sale clause, the mortgage usually cannot be assumed. Under the 1982 Garn-St. Germain Act, however, lenders may not enforce a due on sale clause.

How Do I Value the House?

The first step in this process is to determine a current home value (meaning what it would sell for today). There are several ways to do this:

When spouses can agree on a home value

Some couples can easily agree on a home value. There are several websites that can offer a comparable sale price based on homes in your local area.

You can also look at the tax-assessed value used by your city or county for the property taxes on the home, but this value is often unreliable.

The best way to determine a value may be for the two of you to ask a trusted real estate agent in your area, who may have more recent comparable sales and can give you a good estimate of what your home might sell for.

If you and your spouse can agree on a value, that agreed-upon amount should be included in your divorce settlement agreement, and/or any separate stipulation or written agreement you enter into regarding the sale of the home. Make sure you are certain that the value is fair, especially if your spouse is more knowledgeable about real estate.

When spouses disagree on the home value

If there is any disagreement over the value of the home, or if you have any misgivings about your spouse’s proposed home value, you should hire a professional real estate appraiser who can give you a reliable valuation.

A professional appraiser may charge anywhere from $400 – $700 (depending on the locale), but this fee may be well worth it, especially when you consider that judges are very likely to accept a certified appraiser’s valuation.

If you and your spouse are both unsure of the value but still capable of working together, you may want to select a joint appraiser (someone you hire together) and split the costs of the appraisal fee. This will save you time and money.

If the two of you cannot agree on an appraiser, you may each end up hiring your own appraiser and submitting competing appraisal reports to the court. In this case, a judge will decide which value seems most reliable.

How Do I Determine the Exact Mortgage Balance?

This is the easy part. You can get a “payoff” amount from the lender (bank or institution that holds your mortgage). Don’t forget to include any second mortgages, equity lines of credit, or other encumbrances (debts against the home) such as any liens.

How do I Determine my Share of the Equity?

The exact amount of your share in the home equity will depend on your state’s laws, your judge, and your ability to negotiate. Factors vary, but may include whether:

  • The house is a premarital asset (meaning whether you or your spouse purchased the home before the marriage with separate funds);
  • You made any separate property or community property contributions to the home during the marriage (for example, whether you made payments toward the mortgage, property taxes and/or improvements, or whether you provided any physical labor toward improving the home); and

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