When a couple owns a house and gets divorced, what happens to the house? And how do you calculate a house buyout in a divorce?
A house buyout is a common solution when one spouse wishes to keep the marital home and is willing to compensate the other for any share of the home’s equity. This option allows for continuity and can be especially desirable when children are involved, but it also comes with financial and legal considerations.
Understanding home equity and how it affects a buyout, or other options for equitably dividing marital property, is crucial before making a decision. Seeking professional advice from divorce attorneys, real estate agents, and financial advisors can help ensure you’re making a fair and informed decision.
Want to talk to an expert about your situation? Clever Real Estate can match you with top agents in your neighborhood who will work for a prenegotiated 1.5% commission, ensuring you get to keep more of the payout from the sale. Fill out this simple form to get started!
What is a house buyout in a divorce?
A house buyout in a divorce happens when one spouse buys out the other spouse’s share of the home’s equity. This allows the spouse making the buyout to retain ownership of the home and involves assessing the home’s market value, subtracting liabilities, and determining each spouse’s share.
Emotional attachments, financial feasibility, and legal implications play significant roles in deciding whether a buyout is the best option or whether a different choice might be better for both spouses and the household.
How to calculate a house buyout in a divorce
Step 1: Determine the home’s current market value
A professional appraisal provides the most accurate home valuation, but online estimators or a comparative market analysis (CMA) from a real estate agent can also offer insights.
“You need to agree on a value, which sometimes can be difficult,” explains Atty K. Bruggemann, a matrimony and family law attorney and partner at Gallet Dreyer & Berkey LLP. “Getting an appraisal can sometimes take time because of each party’s perception of the house. One party might say, ‘I put so much time and money into renovating,’ or ‘the comps should be different, our house is so much better than the neighbor’s that just sold.’”
Step 2: Subtract the outstanding mortgage balance
The current mortgage balance, or what is still owed on the home, can be found in monthly statements or by contacting the lender. Deducting this amount from the home’s value determines the total available home equity.
Step 3: Calculate the total home equity
Determining the equity in the home is as simple as subtracting the mortgage balance from the home value:
Formula: Home Value − Mortgage Balance = Total Home Equity
Example:
- Home value: $400,000
- Mortgage balance: $200,000
- Total equity: $200,000
Step 4: Determine each spouse’s share of equity
In community property states, equity is typically split 50/50. In equitable distribution states, factors like financial contributions and home improvements may influence the split.
Bruggemann notes that equity might not be split 50/50 in the event that one spouse put more money toward the down payment or to home improvements or renovations, and only if the money invested in the home was acquired prior to the marriage.
“Those contributions come off the top, and then the equity is still divided equally, but there is a repayment of what one spouse put into the property with separate funds,” she explains.
Step 5: Factor in additional costs
If both spouses are listed on the deed to the home, the spouse who’s staying in the house and continuing to pay the mortgage will likely need to refinance the mortgage loan.
Refinancing can involve closing costs, transfer taxes, and other refinancing fees. These expenses vary by state and situation — for example, real estate lawyers often charge a fee for handling the closing process. If the buying spouse refinances, they must qualify for a new mortgage loan based on their income, credit, and debt-to-income ratio.
Step 6: Determine the buyout payment
An offset is typically marital debt. The spouse staying in the home may decide to take on more of the marital debt in order to minimize the buyout amount.
Formula: (Total Equity ÷ 2) − Any Offsets = Buyout Amount
Example:
- Total equity: $200,000
- Spouse’s share: $100,000
- Offsets: $25,000
- Buyout amount: $75,000
How to finance a house buyout in a divorce
Option 1: Pay in cash
- Pros:
- Quick transaction
- No refinancing required for payout
- Cons:
- Requires substantial liquidity
- Refinancing might still be necessary
If the cash is available, this can be an easy way to buy out a spouse and retain ownership of a home. However, not everyone will be able to use cash for a home buyout, and if both spouses are on the deed to the home, you will eventually need to refinance or assume the mortgage in order to fully separate your finances.
Option 2: Refinance the mortgage
- Pros:
- Allows sole ownership
- Spreads payments over time.
- Cons:
- Requires sufficient income
- Requires a good credit score
- Interest rate might be higher
The spouse who’s buying out the property can (and likely should) refinance the mortgage in order to complete the buyout. This involves taking out a new mortgage loan for the current value of the home, and the spouse being bought out will get paid at closing.
Option 3: Offset the buyout with other assets
Spouses can negotiate using retirement accounts, vehicles, or other assets to balance the buyout amount. Depending on the value of these assets, offering them to the spouse being bought out in lieu of a lump-sum equity payment might be a good choice.
What are your options for the home after a divorce?
Before deciding which option will work best for you, make sure to consult with an attorney, whether a divorce attorney, a real estate attorney, or both.
Option 1: Buy out your spouse and keep the home
This option works best for those who can afford the financial responsibility and who prioritize staying in the home.
Option 2: Sell the home and split the proceeds
Selling offers a clean financial break between spouses, though the total available equity will be reduced because of the cost of selling a house, including realtor fees. The sale proceeds will be divided according to the divorce settlement.
If you want to sell for top dollar and pay less in fees, consider hiring a low-commission agent to handle the sale for you. Clever pre-negotiates a 1.5% commission rate with experienced agents all over the country and can match you with one or more today. Fill out this short quiz to get started!
Option 3: Co-own the home temporarily
Some ex-spouses opt for temporary co-ownership, especially when children are involved. However, this can lead to complications in financial and personal matters, especially if the split is not amicable, if the spouses disagree on basics like home maintenance or a selling timeline, or if one spouse needs a lump-sum equity payment in order to start over somewhere else.
“So many issues come up, especially when one person is in the house and the other person is waiting in the wings for it to be sold,” Bruggemann says. “The person in the house is scrutinized for the upkeep and maintenance and whether they're compromising the asset. It gets messier the longer one person stays in the house and both are on the hook.”
Option 4: Co-own the home long-term (with or without a buyout)
This option won’t work in most divorces, but it might be a decent fit for a small handful of situations.
Some spouses might decide to continue to co-own the home for an extended period of time, which could be preferable if there are young children involved, or if both spouses agree that refinancing isn’t desirable because of higher interest rates.
Divorcing spouses with children who can handle a “nesting arrangement” might consider this option. In a nesting arrangement, the children stay in the family home every night, while parents rotate in and out of the house based on the custody agreement.
Spouses who are divorcing amicably and who don’t want to refinance for other reasons might also consider this option. It can allow one spouse to buy out the other (either in a single payment or over time) without refinancing.
In these situations, Bruggemann says, “One party stays and takes on all the liability, and we do agreements with indemnification that say any tax liability or liens are going to be solely the responsibility of the person who's staying in the house.”
If the departing spouse would like to qualify for a new mortgage loan, it’s possible to present a document to mortgage lenders that states that the other spouse has been paying the mortgage in full for at least one year, and that the spouse applying for the loan has forfeited their ownership interests in the home.
Special considerations for a divorce house buyout
When children are involved
Courts may prioritize one parent retaining the home for stability, especially if the parent remaining in the family home has primary custody of the children.
Hidden costs to consider
Post-buyout expenses include property taxes, maintenance, and homeowner’s insurance. The spouse buying out the home should ensure they will be able to pay these costs.
The emotional aspect of keeping the home
While keeping the home may feel comforting, it’s essential to assess long-term financial viability.
Next steps: Navigating a house buyout in divorce
Divorce is stressful and complicated, and dealing with a huge financial task in the midst of it – a house buyout – can feel overwhelming.
Consult with a divorce attorney, even if you’re not using one in the divorce process. A real estate agent and a mortgage lender can also help you understand what the equity payout and other considerations might be for a house buyout. And a divorce financial planner might be a good choice to ensure you’re considering the long-term financial impact of all your options.
Need to find a real estate agent? Get matched with low-commission agents charging just 1.5% in fees and keep more of your home’s sales price for your own needs. Find an agent today!