Splitting up the equity if you are splitting up: A Guide for Divorcing Couples
Divorce is a challenging process, and when it comes to shared assets like a house, navigating the complexities of mortgages and equity division can add an extra layer of stress.
Understanding your options and making informed decisions can help streamline the process and pave the way for a smoother financial transition. Working with an experienced mortgage loan officer who’s helped clients navigate the process is a good start.
Option 1: Sell the House and Divide the Proceeds
One common approach is to sell the house and divide the proceeds between both spouses. This method provides a clean break, allowing each party to move forward with a fresh start and eliminates the mortgage on the house you no longer live in hanging out on your credit. It's essential to consider the current real estate market conditions, as they can impact the selling price and the speed at which the property sells.
Option 2: Refinance to Buy Out the Other's Interest
For a spouse who wishes to retain the home, one can refinance the mortgage to buy out the other's interest. This involves working with a lender to secure a new mortgage that covers the existing loan and pays off the departing spouse's share of equity. It's crucial to have an agreement on how you will handle the amount of equity. You can either agree to an amount in advance or leave it in the hands of the appraiser to determine the value which may help one spouse and harm the other if the value comes in higher/lower than expected.
Steps to Refinancing:
Consult with a Mortgage Professional: Seek advice from a mortgage broker or lender to explore refinancing options and understand the financial implications. If you’d like our team to put together options for you, you can get started here.
Determine Home Value: Some clients prefer to have an appraisal done in advance to determine the fair market value of the property. Please note that the appraisal your lender orders may be higher or lower than that of an appraisal you get in advance.
Negotiate the Buyout: It’s best to know what both parties think is fair based on the value. As mentioned, you can have an independent appraisal done or have a real estate agent do a “CMA” or wait until the lender’s appraisal is done and just accept that value wherever it comes in at.
Secure the New Mortgage: The spouse keeping the home will need to qualify for a new mortgage to cover the outstanding balance and the buyout amount. This process often requires a stable income and a good credit history.
Transfer Ownership: Once the refinancing is complete, the departing spouse's name can be removed from the mortgage, and the remaining spouse assumes sole ownership. You can initiate the refinance before or after the divorce is finalized. Keep in mind that in Minnesota (and some other states), if the refinance is done before the divorce and a quit claim deed is filed, the departing spouse will still maintain a “spousal interest” in the property.
Seek Professional Guidance
In our experience, clients who are going through a divorce or who have recently been divorced usually find that working with our team to guide them through the process brings them greater clarity and allows them to mentally get a “clean start.”
If you’d like to discuss your options, book a free 15 minute call with us!