For most people, a home is the biggest asset they acquire during a marriage. That also means in a divorce, a home can produce the biggest headaches when it comes to deciding what belongs to whom. There are emotional attachments to deal with, and if children are involved, consideration must be given to whether or not it is in everyone’s best interests and financially feasible to have one party keep the family home.
If you want to buy out your spouse’s interest, you need to ask several questions and approach the purchase with the same due diligence used to purchase any home. The issues you will face are going to be no different than those involved in buying from a third party. Here are some important questions to ask before you make any final decisions:
‘How much equity do we have in the home?’
Equity is the amount of net value you have in a home after you figure out what the value is and subtract any liens or encumbrances. There are several possible ways to arrive at a figure.
The most accurate valuation method is to get a full appraisal done by an experienced appraiser. An appraisal is an unbiased professional opinion about a home’s worth and is almost always used in purchase or refinance transactions. An appraisal helps protect not only the buyer or the seller, but lenders as well, because a home serves as collateral for a mortgage.
Another option for determining value is a broker price opinion, often referred to as a BPO. This is executed by a licensed real-estate agent, broker or an appraiser. Sometimes, people opt for a BPO because it costs much less than an appraisal and can be performed more quickly.
A third valuation method is a comparative market analysis, or CMA. It is also performed by a real-estate broker but focuses much more on comparable sales of nearby properties.
Some people may try to use a property tax assessment as a valuation method. The drawback here is that values are not updated frequently, so you run the risk of not having a good indicator of what the current market value of the home actually is.
Once you have an accurate value in place, you must subtract any liens, such as a mortgage balance or an equity line of credit that you have tapped. A lien is considered anything that is debt related to the property. Once you determine the value and subtract all liens, you will have an accurate value of the equity in the property.
‘How much do I owe my spouse if I buy them out?’
It depends. In a community property state like California, you will owe them half of the equity in the house. In an equitable distribution state, courts divide property in a fair and equitable way, but not always in a 50/50 split. They can take many other factors into account.
Further complicating matters is that in some states, there is what is known as a separate property contribution. For example, if you enter a marriage with separate assets, such as money in a bank account, and you make a down payment on a residence that both you and your spouse live in, this amount may be deducted from the value of the house before it is divided among spouses. This may also apply if separate funds were used for improvements on a residence or any payments were made to reduce the amount of principal of a loan used to finance the purchase or improvement of the home. If you are the spouse seeking credit for a separate contribution claim, it will be up to you to produce sufficient documentation to support your claim, depending on the laws of your state.
‘What size mortgage will I need to complete the buyout?’
This will depend on a number of factors. If you have other assets that you can apply to the buyout amount, then you can reduce the amount of the mortgage you will need to apply for when you become the sole owner.
On the other hand, you may decide to pull out cash from the property to satisfy the buyout terms. In this case, the new mortgage would be a bit larger. You should always start by working with an experienced divorce mortgage advisor to determine the “maximum” loan amount that you can qualify for, and then work backward from there to determine the buyout structure.
‘Can I refinance a home in my name only before a divorce is final?’
Yes. This assumes that you are able to qualify on your own and that you are not using spousal support or child support income to qualify. One of the big benefits of doing this is that settling the issue of what happens to the family home early on in the process removes a large barrier that sometimes causes a lot of conflict in divorces. It also allows the spouse who is keeping the house to have a much better idea of what his or her expenses will be after a settlement takes place.
‘How are interest rates impacted in a buyout?’
It depends on the timing, and of course, the economic market conditions at the time you apply. However, if a refinance is done prior to a settlement. This is known as a “cash-out refinance”. This type of financing typically comes with interest rates that can be upward of 0.25% higher than with a “rate-and-term refinance.” A rate-and-term refinance comes with better terms because. It is being done pursuant to a divorce marital settlement agreement. Once the buyout is complete. Proceeds go straight to the ex-spouse through escrow.