Spouses going through a divorce will need to divide both assets and debts acquired during the marriage. On occasion, one or both of the parties may wish not to sell a home, whether it is the primary marital residence or a vacation property. This decision, however, will impact both spouses unless the spouse retaining the house (i) has sufficient resources to “buy out” the other spouse, and (ii) has the ability to remove the other spouse from the mortgage.
In addition, if there is going to be a delay in your buyout of the equity, you need to specify (i) whether the home is being valued today or at some date in the future, and (ii) how the expenses for the home will be paid pending the future sale or buyout.
- know that debt must be divided
- consider a buyout
- remember that you can still be accountable to the bank
- clearly define the buyout plans
- consider the difficulties
- assume it will be easy to refinance
- assume financing for a new residence will be easy
- leave it to chance
- expect to be able to quickly sell the home
Remember debt incurred during the marriage, like an asset, is marital and must be divided during the divorce. While spouses generally consider how they will divide assets in a divorce, for certain couples the division of debt is equally or more important. Debt incurred during the marriage, like an asset, must be divided (or apportioned) at the time of your divorce. In other words, your divorce will be the time that you and your spouse can determine which one of you will be responsible for particular debts going forward, or how a particular debt will be shared by you both.
Consider whether you or your spouse has the resources to buyout the equity in the home from the other spouse. When the debt that you are dividing is a mortgage on a home, the first question to be answered is whether the spouse that wishes to keep the home will have sufficient resources to buyout the other. This can be particularly difficult for a couple whose major asset is their marital residence. You will need to have the home appraised to determine the equity in the residence based on its current value. If we assume the parties are equally entitled to the share the equity, the spouse that wishes to keep the residence would need to pay 50% of its value to the other spouse to buyout the other spouse’s interest.
As an example, if the home is worth $1,200,000 and has a mortgage of $800,000, the spouse keeping the property would need to pay a $200,000 buyout. Typically the buyout would be “paid” by the other spouse simply taking a larger share of a different asset (i.e., a different home, savings account, etc.). Of course, if there are not sufficient other assets, it becomes more difficult to structure such an arrangement. Finally, the spouse that is considering keeping the home must consider whether he or she can financially afford the buyout and assume the cost of the home/mortgage going forward.
Remember: even if your spouse agrees in your divorce to assume the financial obligation of the debt, the bank can still turn to you for collection. It will be important for you to be removed from the existing debt. The only way that this can be accomplished is through the sale of the property or its refinancing. Accordingly, if your spouse wants to keep the house, he or she will need to refinance.
If the parties are keeping the home and postponing a buyout to a future date, be sure to define (i) whether the home is being valued today or at some date in the future, (ii) how the expenses will be divided pending the “buyout,” and (iii) when the “buyout” will occur. Some couples will agree that one spouse will remain in the marital residence for a few years following the divorce. This may happen, for example, when the parties decide to keep the marital residence for a few years to allow a child time to graduate high-school.
When this decision is made, it is important to agree whether the property is being valued at the time of the divorce or at the time of the buyout. In other words, is it valued today, or when your child is going off to college in two years? Of course, you will also need to reach an agreement about how the costs associated with the home—including the mortgage and real-estate taxes—will be paid for the next two years.
Finally, you should fix a hard deadline for when the buyout will be paid. In this example, the spouse that is not continuing to reside in the home should request that the other spouse agree to either sell the home, or buyout the other spouse’s interest (and refinance the mortgage), within two years.
Consider the difficulties, both personal and financial, of sharing a home with your ex-spouse following divorce. Some spouses consider alternating time in a home following their divorce. While this practice, sometimes referred to as “nesting,” can work for certain couples, spouses should seriously consider a different solution. Even if the idea is appealing at the present time, both spouses will be moving on with their lives and “nesting” may become more difficult in reality than it appears in concept. Consider, for example, the impact of the introduction of a girlfriend or boyfriend.
Unfortunately, it has become increasingly difficult to refinance existing debt. Remember, that just because you and your spouse have agreed to let one of you off the hook, this does not mean that the bank is required to permit the refinance. If you are concerned about your credit and ability to secure additional financing, do not assume your spouse, who is keeping the house, will necessarily be able to refinance.
Unless you have been removed from the outstanding debt of your previous residence, you may not be able to obtain financing for a new residence. Divorcing spouses should consult with a financial advisor or lending specialist to discuss how their ability to obtain financing for a new home will be impacted if their existing debt is not extinguished.
Your agreement should make clear the ramifications if your ex spouse is unable to refinance. For example, the spouse that is not keeping the home should consider requiring that a failure to refinance within a particular period of time (i.e., 3 months) would require the listing and sale of the property.
While the market is improving in certain areas, never assume that you will be able to quickly sell your house. You will want to maximize the value for your home, and, unfortunately, this can take time. So, if you and your spouse agree to defer the sale or buyout—and foresee a future need for cash—be sure to build in sufficient time so you are not left conducting a fire sale.
While homes are the most common of large assets (and debts) that are dealt with in a divorce, this advice can also apply to other large assets and debts that are acquired within a marriage. Both spouses need to come up with a plan, with their attorneys and/or financial advisors, to appropriately deal with a home or other large asset that will not be immediately sold—if ever.