People get very attached to their houses. VERY attached. No wonder, we spend so much time searching for the perfect house, waiting anxiously to see if the offer is accepted and pass the home inspection, closing, moving in and turning it into from a brick and mortar building into a home. Our homes are oftentimes our longest-held assets. It’s no wonder when a divorce occurs, people get competitive about who gets to keep the house. There are typically three ways in which a house is addressed in a divorce:
- Buyout: If the home has positive equity in it, meaning that the property is worth more than is owed upon it, one party can buyout the other party’s interest. This typically happens in one of two ways, either the person retaining the property refinances the underlying mortgage and 50% of the net equity due to the other party or, if the property is owned outright and there is no mortgage, by taking a mortgage to pay out the equity due to the other spouse. (If there are sufficient other assets from which to make payment, a mortgage may not be necessary at all). For instance, if a home is worth $300,000 and the mortgage is only $150,000, there is $150,000 in equity so the retaining spouse would be required to refinance the $150,000 mortgage and pay the moving spouse $75,000 for their interest.
- Assumption: If the home is “under water”, meaning that the property is worth less than is owed upon it, one party can “assume” the debt to keep the home. A bank will not allow a refinance under this scenario because there is insufficient collateral to secure the loan. Therefore, the party seeking to retain the home has to negotiate with the lender to let them “assume” the debt which means that the lender agrees to release the other spouse from any responsibility for the loan. Lenders typically do not want to relinquish any collection rights so it can be difficult to get an assumption approved. For instance, if a home is worth $150,000 and the mortgage is $250,000, there is no positive equity in the property so the retaining spouse would be required to “assume” the full $250,000 debt and be responsible for its payment.
- Sale: If the parties cannot agree on how to distribute the house, then the Court will order its sale. Whether this is a good thing or not depends on its worth: If the home has positive equity like the home is the Buyout example, this can be worth it to the parties because they will make a profit off its sale. However, if the house is worth less than it owed upon it, then a short sale is necessary which means the lender has to approve any sale for less than the amount due on the mortgage. If the house is sold at short sale, this can also trigger an unearned income issue and tax liability. For example, if the home is worth $150,000 and the mortgage is $250,000, and a buyer is willing to pay $150,000, the lender must approve the $100,000 difference between the amount due and sales price. Then, that $100,000 difference can be “canceled” by the lender, meaning that they accept the sales price in satisfaction of the full debt. However, this can result in a 1099 for $100,000 for the amount of the debt canceled which must then be declared as taxable income on that year’s tax returns and taxes have to be paid upon that “canceled” debt.
Deciding what to do with the home can be difficult, not just for financial reasons, but emotional ones as well. Note that all of the above options have one if not both parties moving out of their home and starting over someplace else. That can be really tough to handle. But, before deciding to cry over the house, find out your options, maybe you don’t want it so badly after all.