Divorce and Home Equity: How it works
In cases where one spouse wants to keep the house, a home equity buyout — also known as a “divorce refinance” — can help you split the equity.
A divorce refinance is a cash-out refinance that results in a new mortgage with only one spouse on it, and also converts some of the home’s equity into cash.
- How home equity is split in divorce usually depends on state law. Most states use either community property rules (typically a 50/50 split) or equitable distribution based on what a judge considers fair.
- There are three common ways to divide a house in a divorce: sell the home and split the proceeds, have one spouse buy out the other’s share of the equity, or continue co-owning the home temporarily before selling later.
- If one spouse keeps the home, they’ll usually need a “divorce refinance.” This type of cash-out refinance converts part of the home equity into cash to pay the other spouse and removes them from the mortgage.
Divorce and home equity often go hand in hand, since a house is usually one of the largest assets a couple must divide. Exactly how home equity is split in divorce comes down to your state’s laws and the details of your financial situation.
In this article, we cover four steps you should take as you decide how to divide the equity, how each person will receive their share and whether you’ll need to apply for a new mortgage.
How is home equity split in a divorce?
A court will decide exactly what proportion of the home equity each partner should get, based on your state’s laws.
Exactly what strategy you use to achieve that end goal, however, is up to you. Here are three common options:
- Sell the home
- Buy the other spouse’s equity (home equity buyout)
- Co-own the home (sell it later)
Here’s a breakdown of each option and when to choose them:
| Option | How it works | Best when… | Financing needed? |
|---|---|---|---|
| Sell the home | The proceeds from the sale will be split between the spouses | You want a clean break | No |
| Home equity buyout | One spouse will take over sole responsibility for the mortgage, and the other will receive half the equity | One spouse wants to keep the house and can handle the mortgage payments on their own | Cash-out refinance |
| Co-ownership (delayed sale) | Both spouses will continue to own the home, and will split the proceeds of any future sale | You want your children to continue to live in the home, or you want to wait for the market to improve | No |
How to split a house in a divorce, step-by-step
1. Determine how much equity you have
Before you decide how to handle equity in a divorce settlement, you’ll first need to figure out how much home equity you have. Home equity is the difference between your home’s value and any outstanding loans or liens.
Below are the two most common ways to calculate home equity:
- Ask a real estate agent to prepare a comparative market analysis (CMA). A CMA estimates your home’s value by comparing it to similar homes nearby that were sold recently. A CMA is typically prepared by a real estate agent.
- Get a home appraisal. A home appraisal is a more detailed evaluation of your home’s value and must be prepared by a licensed appraiser. An appraisal usually costs between $300 and $600, and most lenders require them for mortgage financing.
Use LendingTree’s home equity calculator to find out how much equity you could have in your home.
2. Decide who gets the house in the divorce
If either you or your ex-spouse wants to remain in the home following your divorce, you’ll need to negotiate who will keep it.
Here are two important financial questions to answer before you decide who gets the home:
Who can afford the monthly payment?
It can be a shock to suddenly shoulder a mortgage payment on your own if you’re used to being in a two-income household. If the house will be in just one person’s name after the divorce, that person will need to qualify for a new mortgage based on their individual income, debt load and credit score.
Who can handle maintenance and repairs?
Many experts suggest budgeting at least 1% of a home’s value each year for upkeep. Whichever spouse ends up with the house might want to consider buying a home warranty for extra insurance against major issues with costly appliances or home systems. The extra $20 to $150 per month may be well worth it if the home is older and likely to need repairs or upgrades.
3. Agree on how to split the equity
Divorce attorneys typically decide how to split the equity as part of your final divorce decree. But where you live, how you came to own the home and how you hold title to it may come into play.
Here are some common ways of splitting your assets in a divorce:
In general, you’ll divide your home equity evenly if you own a home in a community property state.
There are currently nine states in the U.S. that treat a divorcing couple’s property as community property: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
In equitable distribution states, how you divide your property is based on what a judge views as “fair,” given the specifics of your situation.
A fair arrangement won’t necessarily be one in which everything is split equally. For instance, if you inherited a home in an equitable distribution state, it’s usually awarded to you.
There are several different ways to take ownership (or “title”) of a home. Taking legal ownership is also known as “vesting.”
Each title vesting option gives you different rights to use the property and, in some cases, may restrict how much ownership (or “interest”) you have. For example, “tenancy in common” is a type of vesting that allows multiple people to co-own the home without having equal interest.
You and your spouse are free to come to any agreement on splitting your equity that makes both of you happy. However, a judge must approve it before you can finalize the divorce, so if it’s grossly unfair to one party, you may run into roadblocks. And if you can’t agree at all, a judge will ultimately have to make the decision for you using your state’s default approach (that is, either equally or equitably).
4. Determine if you qualify for an equity buyout
An equity buyout loan, also known as a “divorce refinance,” is a special-purpose cash-out refinance used to tap as much equity as you need to pay your spouse’s home equity share. You typically can’t pocket any extra cash; it all has to go toward buying out your ex-spouse.
Use LendingTree’s cash-out refinance calculator to estimate how much cash you may be able to get from your home.
If one spouse plans to keep the home in a divorce, they typically have to “buy out” their spouse’s portion of the equity. If they don’t have enough cash to cover the buyout, they can choose to convert some of the home equity into cash using an equity buyout loan.
The spouse who wants to keep the home must qualify for this loan on their own, so make sure to brush up on the minimum mortgage requirements for different loan programs.
General qualification guidelines for equity buyout loans
- Maximum loan-to-value (LTV) ratio. Your LTV ratio measures how much you can borrow compared to your home’s value. Most equity buyout loans allow you to tap up to 80% of your home’s value (or 65% for a manufactured home). However, if you’re a military borrower, you can boost your LTV up to 90% of your home’s appraised value with a loan backed by the U.S. Department of Veterans Affairs (VA).
- Maximum debt-to-income (DTI) ratio. Lenders look at your total debt, including the new mortgage payment to calculate your DTI ratio. Depending on your loan type, you can typically qualify for an equity buyout loan with a DTI as high as 41% to 45%.
- Credit score minimum. A conventional loan requires at least a 620 credit score. You may need a loan backed by the Federal Housing Administration (FHA) if your score is between 500 and 619.
You may have to provide documentation proving that you owned the property for at least one year, that you lived in it with your spouse and that all parties involved are on board with the buyout loan.
In fact, in some cases, if your divorce settlement doesn’t include language about the equity buyout, you may not qualify for one at all. Instead, you’d have to utilize a generic cash-out refinance.
What happens if I can’t refinance after a divorce?
If you’re unable to refinance your home after a divorce, you may have to wait or sell it to protect your equity from a potential foreclosure.
Waiting gives you the option for a deferred sale, which is when both people continue to co-own the house, but only one continues to live in it. This can make sense for families who want their children to remain in the home, or for couples who divorce during an especially bad time for the housing market.
Can one spouse keep the home and avoid refinancing?
If one spouse wants to avoid refinancing and remain in the home permanently, things can get messy. Removing the other spouse’s responsibility for paying the mortgage debt — as well as their ownership in the home — is far more complicated without the refinance.
Here’s what to consider if avoiding a refinance is crucial:
- How you’ll remove one spouse’s responsibility for the mortgage debt. There are a few options for removing a name from the mortgage without refinancing. You’ll have to get the lender’s approval, have one spouse assume the mortgage or have the departing spouse declare bankruptcy.
- How you’ll transfer ownership to one spouse. The legal term for ownership is “title,” and it’s possible to transfer title to another person using a document called a deed. You aren’t required to have a lawyer help you create a deed, but it’s a good idea to consult one anyway — they’ll make sure you abide by the law in your state.
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