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Divorce Tip #5: How to Split Marital Home in Divorce.

How to split marital home in divorce is one of the top decisions that divorcing couples have to make. This is when you want your clear head to prevail and do the math.

Dividing your assets and debts – the rule of the land you live in.

Your home is your sanctuary, the place where you raised your children, the place that you poured your heart and sweat into, your pride and joy… Believe me, I’ve heard all of these responses. These are very natural reactions, but your emotional attachment to the marital home can be your worst enemy in negotiating your settlement with your spouse. You have to be dispassionate. You have to consider the entire financial jigsaw puzzle and not zero in on a single piece.

What’s the home worth?

First, you’ll have to figure out (and agree upon!) what your home is worth. Some assets like your bank accounts or a 401(k) are easy to value – all you have to do is look at the account balance on your most recent statement. But coming up with a value for your home will require some effort.

Your choices are to:

-Get an appraisal from a certified real estate appraiser. He or she is certified by a licensing board and is regulated by the Government. The appraisal is made an independent party with no interest in the property.

-Ask a real estate broker to run a comparative market analysis (“CMA”). They will typically do his for very little or no cost. Make sure that your CMA is prepared by a licensed broker with current market knowledge who will compare your property to similar properties. Note that any two brokers may come with differing values because they may use different comparables in assessing your property.

-Use an internet resource, which is FREE but may be as precise as throwing darts blindfolded.

-You can forget the experts and each take a guess, and come up with your own valuation.

In this unstable real estate market, many divorcing couples prefer to come up with their own guess or get a free market analysis as opposed to paying for a formal real estate appraisal. Is this a good idea? Probably not. The rest of the settlement will be build around the value of the house, so it may worth the expense to have a certified appraisal that neither of you can challenge in the future. Plus if you work with attorneys, they will routinely order appraisals from independent parties anyway.

Use any method you both can agree on and come up with an estimated fair market value of your home.

How do we actually divide our home?

No, you won’t cut your home in half. Once you agree on how much your home is worth, you’ll have to subtract all debts to get to the number that you will be “dividing”. That figure is called the net equity.

EXAMPLE

Your home is worth $750,000

Estimated market value $750,000
Mortgage balance $(150,000)
NET EQUITY $600,000

So in this example, you would each be entitled to $300,000. The next big question is how you get this money out of your home. Basically it boils down to three options.

-You keep the home and buy your spouse out of his/her half of the net equity, or $300,000 (in our example). This means that you would have to give him/her $300,000 of cash (OR other asset) and you could take on $300,000 of marital debt in return.

-Your spouse keeps the home and h/she buys you out of your share of the net equity.

-You sell the home and split the proceeds.

Any of these options will produce outcomes that have both an upside and a downside and will impact your divorce settlement differently.  Let’s take a closer look at each option so that you can make an informed decision. After all, that’s the purpose of this book.

Option #1: You keep the marital home.

Can you afford to keep the home? If there is a mortgage, it won’t be enough just to talk your spouse into just signing over the title. It’s easy enough to remove him from ownership – all he/she has to do is sign and record a quitclaim deed. But that won’t take him/her off the mortgage. It may not be easy, or cheap, to refinance the home in your name.

Call your mortgage lender and find out if you qualify for a new mortgage. The lender will take a close look at your credit and your financial situation, mainly your income. This may be a challenge. Many divorcing women have little or no income because they’ve spent years as unpaid childrearing professionals. Their only source of income may be child support and spousal maintenance, and that’s temporary. Most lenders will consider this to be qualifying income, particularly if you have strong credit and other liquid assets.

So let’s assume that you qualify to refinance your mortgage to your name. But just because you can afford the house payment, doesn’t mean you can afford the house. You’ll have to crunch the numbers first. Fill in the expenses next to each category below.

Housing Expenses

Mortgage payment $
Second Mortgage $
Homeowner’s Insurance (not included in mortgage) $
Property Tax (not included in mortgage) $
Homeowner’s Association dues $

Utilities/Common Charges:

Gas/Electric $
Phone/Cell $
Cable/Internet $
Trash $
Water/Sewer $
Alarm Monitoring $
Home furnishings that you will have to replace $
House Cleaning $
Window washing $
Lawn/Garden maintenance $
Snow Removal $
Miscellaneous repairs $
Total Monthly Cost of Keeping the Home $

Once you add it all up, plug it into your budget to see if you can afford it along with the rest of your living expenses. The rule of thumb is that your house payment, including insurance, taxes, and utilities, should NOT exceed 40 percent of your monthly pre-tax income.

EXAMPLE

Your Income:

Earned income: $2,500
Child support: $1,500
Spousal Maintenance: $4,000
Total monthly Income: $8,000

Your monthly house payment and utilities should NOT exceed: $3,200.

Remember, child support and spousal maintenance will not last forever; they are only temporary sources of income. Make a plan now for how you will replace this income in the future.

Wanna keep the house but can’t refinance now?

Your spouse would have to agree to keep his/her name on the mortgage until you could re-finance and release his/her name from this debt. Just know that he/she won’t be thrilled to stay on the mortgage because the mortgage holder will still hold him/her equally responsible for the loan. And if you get stuck between a rock and a hard place down the road and your home goes into foreclosure, your spouse will take the hit along with you.

Here is the other kicker. Based on our example, your spouse is entitled to $300,000, or a half of the net equity. If you keep the home, you’ll have to buy him/her out. You’ll have to decide what you are willing to give up and give to your spouse in exchange for keeping the home. Do you want him/her to take another $300,000 in cash? Be careful!  You don’t want to be “house

Poor” and sacrifice both security and financial flexibility.

Option #2:  Your spouse gets the marital home.

Instead of giving your spouse $300,000, you receive $300,000. He/she will have to figure out where to get the dough to buy you out of your share of the home. Again, your soon-to-be ex would have to:

1-Refinance to pull out the $300,000 cash out of the house

2-Borrow

3-Give you another asset that’s worth $300,000, or

4-Take over some of your marital debt.

If he/she walks away with the house, you will have to buy one in the future. But not so soon!

Even if you have a stellar credit score now, it may take a hit after your divorce. And what about your income? Don’t rush into anything. Wait at least six months before you consider buying another house. By that time you’ll have a good handle on your cash flow, and a better sense of what you can afford, and what you want.

Option #3: You sell the marital home.

If your home has positive equity, you can sell it and split the net proceeds (which is the cash you get after paying off your realtor and the mortgage). Great if you can sell it soon, but not so great if you can’t or choose not to sell at this time because the market is not right. Read more below about being stuck as “financial partners” for a while.

Our home is worth less than its mortgage balance!

That’s a tough one but pretty typical in this shaky economy.  Some divorcing couples decide to suck it up and keep the home until the time is right to sell it. It’s kind of like staying in a “financial partnership” for a while.  Others jointly decide to let their home go into a foreclosure or do a short sale.

Let’s take a closer look at all options:

Waiting to sell until the market turns around

This is never easy and will require collaboration and decent communication between you and your spouse, at least until you sell the home. You will have to decide on things like:

-When is a good time to sell?

-If and how much you should invest into improving your home in order to sell it

-Choosing a selling agent

-When and how to adjust the asking price if there are no bites

-How to split all costs associated with keeping the home before it gets sold (like mortgage,

-insurance, taxes, utilities, maintenance, and repairs)

That means lots of contact/negotiation with your ex-spouse, maybe for years to come.  To minimize potential conflict in the future, you will need to spelling out each other’s obligations.

Do your homework before you say “I do!”

I don’t have to tell you that looks can be deceiving (pun intended). So don’t be surprised that during the transfer of the title to you, some previously unknown (to you, anyway!) encumbrances may surface. A few examples of the financial skeletons in the closet may be:

-Are there liens, recorded or unrecorded?

-Are there unpaid fees for previously done work on the house, so-called “mechanic’s liens”?

-Did your spouse do any real estate trades which may have involved unrecorded 2nd or 3rd mortgages?

-Are there outstanding gambling debts?

-Is your spouse involved in new home construction or house “flipping” – either of which may involve blanket liens on any and all real estate owned?

Never ever use your emotions to guide you when deciding if you should keep the house! It’s a pure numbers game.

Before you make a final decision on how to split a marital home in divorce, look at your entire financial picture. In divorce your assets and debts are divided as one pie, and depending on the divorce laws of your state, you may not always get exactly half of everything, but close to it.

Divorce Mediator and Certified Divorce Financial Analyst, Denisa Tova, CFP, CDFA, helps couples divide finances rationally and prepare practical parenting plans.

How to Split a Marital Home in Divorce – nerdwallet article.