The division of marital assets is one of the biggest sticking points for couples calling it quits. And among all the assets a couple owns, the family home tends to be one of the most problematic. It’s not liquid like a bank account. Hence, it can’t be split like one. The property must either be sold with the proceeds divided between the spouses (after paying off the mortgage) or one party must buy out the other’s interest.
The simplest solution is to sell the property outright and split the proceeds. Unfortunately, there are potential downsides. The housing market could be going through a downturn, leaving the divorcing couple to sell at a loss. Or one of the spouses might wish to stay in the house, whether for sentimental reasons or to minimize the divorce’s impact on the couple’s children.
In both latter cases, a buyout may be the best option. It’s a simple process on paper. One party buys out the other’s interest in the home. Getting it done is a little more complicated. This article will discuss important considerations to take into account in the event you decide to take this route.
Having The House Professionally Appraised
In order to effect a buyout, your home must be appraised. There are a few ways to do it depending on your desire for accuracy. One way is to ask a local realtor or real estate agent for help. It’s unlikely that person will be licensed to provide a professional appraisal. However, he or she can provide a rough estimate of your home’s value based on recent sales of similar properties.
Another method is to hire a licensed appraiser. This individual will inspect your home and provide a more accurate assessment of its value than the estimate provided by a real estate agent. The downside is that a professional appraisal can cost $400 or more.
Note that even if you and your spouse agree on the value of your home, it’s a good idea to have it appraised. That will prevent one party from unwittingly taking advantage of the other.
Can The Buying Party Refinance The Mortgage?
A common problem divorced couples run into when one party wants to keep the family home is finding a lender willing to refinance the loan. The original mortgage, which presumably lists both parties, was extended based on the credit risk associated with the couple as a whole. When the loan is refinanced, the new mortgage will carry only one of the spouse’s names. If that person has poor credit, he or she may be unable to convince a lender to underwrite the new loan.
Let’s assume a lender is willing to refinance your mortgage. You’ll need to borrow enough to pay off the existing loan and pay your spouse for his or her part of the equity.
For example, suppose your house is worth $400,000. You and your spouse owe $270,000 on the mortgage and have have a combined $130,000 in equity. Assuming the buyout would be achieved solely with the money from the new loan (as opposed to using your savings), you would need to borrow $335,000. That figure reflects the $270,000 owed to the current mortgage lender and $65,000 to buy out your spouse’s half of the equity.
Are Major Repairs Needed On The House?
Before buying out your spouse, consider whether your house requires any major repairs. For example, is the roof ready to cave in? If so, you’ll need to replace it, a job that can cost $10,000 or more. Are there large cracks in the wall or chimney? Here too you can expect the cost of repairs to run into the thousands of dollars. How about extensive water damage or issues with the sewer lines?
The point is that some problems are expensive to fix. Hence, the repair cost should be reflected in the amount you pay your spouse for his or her part of the equity.
If you have your house professionally appraised (see above), these issues will be taken into account by the appraiser. Otherwise, make sure you account for them yourself.
Adjusting The Price Via Other Settlement Terms
Many divorcing couples adjust the terms of their settlement agreement to accommodate a buyout. For example, if the buyout amount is $65,000 (from our earlier example), the individual making the offer might cede ownership of other marital assets worth $65,000 in lieu of cash. Or that individual might agree to forgo alimony payments.
Adjustments to a settlement agreement can pose other complications, including some that involve tax considerations. But with the help of an experienced divorce lawyer, it is possible to come up with a proposal that streamlines the buyout and benefits both parties in the long run.