Couples going through a divorce typically divide all marital assets, including the equity in their home, as part of the divorce settlement. The question of how each spouse will receive a fair portion can often become contentious. Here is a look at how to protect your equity in a divorce settlement.
Determine The Amount of Equity Before The Divorce
The first issue that must be resolved is to assess the amount of home equity the couple has. Home equity refers to the difference between the value of the home and any outstanding loans or liens against it.
There are two main ways that home equity can be calculated:
1. A Home Appraisal
An unbiased, licensed home appraiser can prepare a detailed report known as a home appraisal. These appraisals generally cost a few hundred dollars and are often required by lenders for mortgage financing.
2. A Comparative Market Analysis
A real estate agent can prepare a comparative market analysis report that compares the home to recent sales of similar homes in the area.
Decide Who Will Get The Home In The Divorce
If the couple is not planning to sell the home, they will need to negotiate which spouse is going to reside in the home. This requires answering some important financial questions, such as:
Can One Spouse Afford The Monthly Payment On Their Own?
House payments that were easy for a two-income household to make may become a financial burden when just one spouse takes on the responsibility. If the house will be placed in just one spouse’s name after a divorce refinance, that spouse will need to qualify for the new mortgage based on their income alone, as well as any debt they end up with at the end of the divorce.
How Much Equity Will Remain After The Divorce?
The spouse who is awarded the family home in a divorce may need to “buy out” the other spouse’s portion of the equity. If they do not have the cash to do so, they may consider a cash out refinance to tap into extra equity over the balance of the current mortgage. This means that they stand to earn a lower profit from the home should they sell it in the future.
Can One Spouse Handle The Responsibility Of Maintaining And Repairing The Home?
Even if one spouse can afford to assume the mortgage payments, it is important to consider their ability to also be responsible for the home’s maintenance and repairs on their own. According to Lendingtree, some experts suggest budgeting approximately 1% of the home’s value each year for its upkeep. Spouses who have concerns about their ability to pay for major repairs may want to consider a home warranty for additional protection.
Decide How Equity Will Be Split In The Divorce
A divorce attorney will outline for you how the equity is split in the divorce as part of the final divorce decree. Some of the factors that may influence this division include the state where the couple lives and how they currently own the home. If the couple is unable to agree on how to equally divide the equity, a judge may have to decide.
Determine Whether A Refinance Divorce Buyout Is An Option
If one spouse wishes to keep the home, they may need to qualify for a refinance divorce buyout. This is a type of cash out refinance that allows them to tap into additional equity to cover their spouse’s home equity share. One spouse may find that they are unable to qualify for a mortgage on their own, particularly if both spouses qualified for the mortgage together when the home was originally purchased.
Some of the factors that will be considered in qualifying include the spouse’s credit score, their maximum loan to value ratio and the maximum debt to income ratio.
Decide How To Use The Equity If The Home Will Be Sold
For couples who are unable to keep their home because one spouse cannot refinance after the divorce, the home may need to be sold to protect the equity from a foreclosure. At this point, the couple must decide how to use the equity after the divorce agreement is final.
It may be necessary to budget for moving expenses, particularly if a spouse will not be remaining in the same area. If the spouse’s credit was damaged because of unpaid debt on the ex-spouse’s part, they may need to rent for a time until their credit can be repaired. There may also be capital gains taxes involved.
Spouses who are assigned debt after a divorce often try to pay it down as quickly as possible as this can improve their credit score as well as their prospects when starting over in a new home.
Schedule A Consultation With The Family Law Attorneys At Milstein Siegel
The division of property in a divorce can be a complicated matter, and you need a reputable legal team to protect your interests. To learn more about property division or to speak to a divorce attorney about your options, contact the experienced team of lawyers at Milstein Siegel to schedule a consultation.
