How to Keep Your House in the Divorce: A Step-By-Step Guide

How to keep the house in a divorce: Take it step by step

Before continuing down this path, it’s important to take a deep dive into your finances to determine if you qualify to refinance by yourself.

“When one spouse is attempting to keep the house, it’s important to remember that you can’t qualify for as much as a single person,”  advises Dawn Fore, a top agent in Houston, Texas who is a trained divorce specialist.

Step 1: Evaluate your finances

When going through a divorce, people often make the mistake of keeping a house they cannot afford because they don’t anticipate the actual cost of owning and maintaining the home on their own.

“Can you pay the mortgage, property taxes, homeowners insurance, and maintenance? There are many hidden costs that homeowners incur,” says Denise Erlich, an Illinois attorney who specializes in divorce and family law. “You should not simply be comparing the monthly mortgage to the cost you would pay to rent a residence. Utilities are probably two times the cost in a house than an apartment.”

You don’t want to give up your rights to other assets to secure the house, only to find out that you can’t afford to keep it.

If you have a mortgage on the property, you have to prove to the court that you’re financially stable enough to pay for the following:

• Mortgage
• Repairs
• Taxes
• Upkeep

There are other things to consider beyond your ability to secure the home from your ex and prove your financial stability. Even if keeping the house is a viable option for you, it might not be the best financial move.

What are you willing to sacrifice to keep your home in the divorce?

You’ll have to decide what you are willing to give up in exchange for keeping the house. You may have to pay tax on some capital gains you make when you eventually sell the home, and that amount of tax burden might eat up an unexpected chunk of your equity.

Here is an example of how the capital gains tax exclusion might work for a married couple:

• You and your partner sell your house for $517,200 profit (that’s $517,200 over what you initially paid for the house) before or during a divorce.
• You’ve both lived in the home as your primary residence for at least two of the five years before the sale.
• Up to $500,000 ($250,000 each) is typically exempt from the sale of your home.
• Therefore, capital gains tax will be owed only on the $17,200 that exceeds the exemption limit.

If you decide to take the house in the divorce, this is how the capital gains tax exclusion might work for a single homeowner:

• You sell your home for $500,000 profit.
• You can typically exempt $250,000 if you’ve lived there for two years before selling.
• You will likely pay capital gains tax on the remaining $250,000.

(Note: The exclusion may be reduced if you purchased the house less than two years before the sale. Also, the five-year period can be extended if either spouse is actively serving in the military, depending on the circumstances. Always consult with your financial advisor or tax professional to determine what’s best for your situation.)

Another potential consequence is the assets you might exchange to offset the house price.

Step 2: Decide on the best way to pay for it

There are a few ways to pay for the home post-divorce. You could buy out your ex’s equity with your own assets or you could try a cash-out refinance, which would release your ex’s equity and allow you to remortgage it, along with the remainder of the mortgage. Of course, you’ll need to qualify for the mortgage on your own.

Let’s take a look at how you might pay for the home in three different scenarios:

• If the house is paid off
• If you still have a mortgage but have some equity
• If there is little to no equity in the home

How to keep the house in a divorce if it is paid off

When you divorce, the home is likely the most significant and most valuable joint asset controlled by your state’s division of property laws. The court typically divides the equity in the house.

When you want to keep the house following a divorce, you may need to use your other assets to offset your ex’s share of the equity in the home.

Here is an illustration of what that means:

Suppose you and your ex have $300,000 equity built into your home. You decide you want to keep the house, and your ex agrees to let you keep it. In this scenario, you will typically be responsible for paying the $150,000 to your ex for their share of the equity built up in the house.

If you do not have enough cash to offset the cost of the home outright, then you may need to give up your claim to other marital assets, which can include, but are not limited to:

• Brokerage or investment accounts
• Different types of personal property
• Reduction in alimony
• Retirement accounts
• Vacation homes
• Vehicles

When you choose to offset your ex’s half of the existing equity in the home, it doesn’t remove their name from the mortgage or deed. You will need your ex to sign a quitclaim deed to remove their name from the property.

Another thing to consider is that you may not have enough assets to offset the home’s value. If that’s the case, you’ll need to secure a loan to pay your former spouse their share of the equity.

If you decide to get a loan, make sure you have enough cash to cover the loan payments, taxes, insurance, and repairs for the house.

How to keep your house in a divorce if you still have a mortgage

When there’s a mortgage on the home, keeping it is more complicated. In many cases, the simplest way to keep the house in a divorce if it still has a mortgage is to refinance.

The best-case scenario is for you to refinance and remove the mortgage from your ex’s name altogether. You’ll need to qualify for the mortgage on your own, so make sure to have all your financial ducks in a row.

Here again, if you don’t have the cash to pay for the house outright or other assets you can leverage, you will probably need to refinance just to pay your former spouse’s half of the existing equity.

Here are some things to consider when refinancing:

• You’ll be refinancing for the existing balance of the original loan.
• You’ll need to add your ex’s half of the current equity to the actual loan total.
• You’ll need to qualify for the larger loan with your income alone.

In general, lenders cap refinancing a mortgage at 80% of the home’s total value. If your debt and your partner’s equity combined push you past that cap, you may not qualify for the mortgage on your own.

Here is an example of what that means:

Suppose your home’s value is $600,000, and your existing mortgage debt is $400,000. Your current equity is $200,000 (the total value minus the total mortgage debt). Your ex’s share is $100,000, or half of the total mortgage debt.

As a result, you need to refinance for a $500,000 mortgage (existing debt + ex’s equity share). But your lender caps the refinance amount at 80% of your home’s value, or $480,000.

In this scenario, your options will be to:

• Secure an additional $20,000
• Negotiate with your former spouse to accept $20,000 less
• Not refinance the house

How to keep the house in a divorce if there is little to no equity

Do you want a home with little to no equity? Why?

Maybe you’ve decided that it’s the right choice for you. One word of caution — don’t let your emotions control this critical financial decision.

You can negotiate with your former spouse to keep the mortgage the same with both your names on the title or deed. But, you must dictate who is financially responsible for the mortgage payments and other expenses that may arise.

Keep in mind that if a payment is missed, and both your names are on the mortgage, the lender views both parties as equally responsible. Consequently, missed payments negatively impact both your credit scores.

Step 3: Determine the value of the home

In general, you can determine your home’s worth by:

• Checking comparable sales
• Getting a comparative market analysis (CMA)
• Getting a new appraisal
• Using HomeLight’s Home Value Estimator as a starting point (and follow up with a real estate agent or appraiser)

Determine your home’s worth by checking comparable sales

Take a look at comparable sales or house comps and analyze similar, recently sold houses.

Comps are a crucial tool in adequately evaluating your home’s worth. Both real estate agents and appraisers take into account the following criteria when pooling comps:

• Location
• Square footage
• Number of rooms
• When you built the house
• Desirable amenities

Determine your home’s worth by getting a comparative market analysis

A CMA can help give you a better idea of what your home is worth, but keep in mind that the value may change over time. Divorce can take a while, especially in states with a divorce waiting or “cooling off” period, and your home’s value will likely fluctuate depending on the state of the real estate market.

“When you’re trying to figure out how much to buy your spouse out for, you need to remember that the preliminary market analysis you get from an agent isn’t the final number for your home’s actual value,” explains Fore.

“I’ve seen home values change in just a matter of months based simply on the time of year. For example, let’s say we provided the home value in the fall, but the divorce and the home buyout didn’t go through until spring, which is when we see home values increasing.”

One thing to consider is that CMAs may value your property for the most money possible. That type of valuation is not helpful when trying to buy out your ex.

During a buyout, you are the buyer; your former spouse is the seller. You may want a lower home value. In contrast, your ex may want to get the highest possible value, so they’ll get more cash for their equity interest.

So what should you do to determine the home’s value? It might be best to get a new appraisal.

Determine your home’s worth by getting a new appraisal

A new appraisal is almost always a lender-required condition of refinancing your home. Beyond the lender requirement, it’s also beneficial to get a new appraisal to get a starting value for your divorce negotiations.

“This may require hiring an appraiser to give an appropriate valuation,” says Brent Morgan, a Texas attorney who specializes in divorce, child custody, and family law. “If you are wanting to keep the house, you will want that appraisal to be as close to the amount owed on the mortgage as possible.”

Depending on your situation, it may be worth spending a few hundred dollars for an outside appraisal to make sure that your home is valued appropriately.

What to do if it makes more sense to sell the house and move on

After going through your financial checklist, you might decide that selling the home is the best thing to do. Selling may enable you to make a clean break and find more affordable housing and a fresh start.

If starting anew is the right choice for you, here are the steps you need to follow.

Step 1: Hire divorce specialists (that both spouses trust)

When selecting a divorce specialist real estate agent, “do your homework,” Erlich advises. That means thoroughly vetting your agent and asking them lots of questions.

Erlich suggests asking potential agents:

Selling the house and splitting the proceeds during a divorce is less complex than keeping the home, but it probably won’t be free from disagreements. After all, both you and your ex’s financial security is at stake.

It’s helpful to find someone you both trust when tackling financial situations.

“Using a financial neutral is always the best choice if the parties are agreeable to working together through their financial issues,” says Lisa C. Decker, a certified divorce financial analyst based in Georgia who specializes in helping couples and their attorneys achieve equitable divorce settlements.

“Make sure your legal and financial experts are certified in divorce. If parties choose to work independently, working with settlement-minded professionals is always better. Litigation should be a last resort only, as it is the most expensive and least predictable path,” Decker advises.

Step 2: Agree on the details of the home sale

You’ve jointly decided to sell the house. That’s a significant step in the process of moving on.

Here’s a list of things you need to consider as you agree on the details of the home sale:

• Appropriate list price
• Lowest offer you’re both willing to take
• Repairs to make or not make
• Value of upgrades
• Whether to sell as-is or not

Step 3: List, sell, and settle

You’re at the point where emotions may flare and battle lines appear. If you plan and expect some of the pain points of listing, selling, and settling, you’ll be able to control your emotions and have a smoother sale.

Here is a list of challenges you and your ex may encounter:

• Agreeing on how to handle buyer concessions, credits, or repairs
• Agreeing on which offer is the best for both parties
• Arranging both of your schedules around showings
• How to divide up the proceeds after the sale
• How the home sale proceeds fit in with negotiations over other assets
• If one spouse is focused on moving on and the other on making the highest profits
• Managing property division laws
• The stress of keeping the home clean and staged
• Tensions regarding which spouse will be living in the house during the sale process

After the sale, the property division laws of your state help determine how the profits and proceeds are divided.

After the home is sold, you may be able to give up your claim to some physical assets or personal property in exchange for more cash from the profits of the sale.

For example, your ex wants sole ownership of the family boat. You can exchange your interest in the family boat and ask for cash proceeds from the home sale.

Sell or keep the house in a divorce? Ask yourself these 8 questions before you decide

Elrich suggests that you ask yourself the following questions when making the decision:

• Can you afford to pay the mortgage, property taxes, and upkeep and not be “house poor?”
• Can you and the children (if there are children) still go on vacations and live a similar comfortable lifestyle that you enjoyed before the divorce?
• What rental options are there (cost, location, etc.), and what would those rental costs be?
• Is there anywhere you can live to pay off debts and save money so that you can save up for a down payment? Think long-term.

Decker encourages you to examine the following financial questions as you make your decision:

• Am I able to qualify for refinancing?
• What significant expenses or repairs can I expect in the next couple of years?
• How will I afford the monthly payments for the life of the mortgage?
• Can I find another place in this school zone or a similar commute?

Don’t be overcome by emotions and let them drive your decisions. Instead, make sure to consult your attorney, divorce specialist agent, accountant, or financial planner before making any decisions.

You may also want to connect with a top-rated agent for additional expert advice about selling your home and for a comparative market analysis. HomeLight analyzes over 27 million transactions and thousands of reviews to determine which agent is best for you based on your needs.

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