Divorce can be an emotionally fraught and expensive process for many people.
Not only does uncoupling signify the death of a marriage, but it also marks the end of a financial relationship. As the divorcing couple works through the process, they have to separate the assets accumulated during their marriage. Everything acquired during this period must be distributed between the two parties.
One of the most common sticking points in a divorce is the house. It's the quintessential marital asset: worth a lot of money and holds a lot of sentimental value. One party may want to keep the house for the children, while the other may want to sell it and divide the profit. Deciding who gets the house can be challenging, even if the split was amicable.
Let's take a closer look at the legal and financial factors at play and how they might affect the outcome.
Is the house community property or separate?
The first step in figuring out who keeps a certain asset is to determine who owns it. Normally, the name on the title is the legal owner of the property. For marital assets, both parties have a claim to ownership.
Let's say you and your spouse bought a home together during the marriage using money earned while married. The house is considered marital property, and the divorcing parties are entitled to 50 percent each. But things aren't always clear-cut.
If one party paid a $100,000 down payment on the house, they are entitled to that much in equity. But the ownership percentage of each party may vary depending on financial factors such as the mortgage. While the second party might not have contributed to the down payment, they might have used their money to pay the mortgage, increasing their ownership stake.
Another complicated scenario would be if one spouse owned the house before the marriage. If the original owner takes steps to keep the house as a separate asset during the marriage, then the judge might rule in their favor. However, asset lines often become blurry in the course of the marriage. The other party might have paid for repairs or renovations to the property, turning a part of the house into a marital asset.
Who will get the house in a divorce?
Assigning ownership during a divorce is always complicated when both parties are listed as the owner. If both names are on the title and mortgage, then the asset will need to be separated. Depending on the state, the judge or mediator will look at available financial data to determine ownership or the allocation of shares.
Most states follow equitable distribution in divorce (i.e., assets are fairly divided, subject to a number of factors), but a few others, such as California and Texas, use community property rules (i.e., assets are divided equally regardless of circumstances).
In equitable distribution states, both parties must negotiate the asset division, or the court will decide the matter for them. In the latter case, the court will consider each party's financial condition, earning power, contribution to the acquisition of properties, and future financial needs in dividing marital assets.
For instance, the judge can determine that one party owns 55 percent of the home while the other owns 35 percent. The divorcing couple will then work together to reach an agreement. One party could buy out the other for their share of the house or offer another asset in exchange.
Can you buy a house while going through a divorce?
The short answer is yes, but doing so can introduce complications to an already challenging process.
If you wish to buy a house during a divorce, you will need to negotiate with your spouse to ensure that the property is considered separate from the shared assets that will be divided. This is especially important in community property states, where all properties acquired during a marriage are considered marital property, regardless of whose name is on the title.
Your new home may also be considered shared property if you use any marital assets (e.g., funds from a joint bank account) for its purchase. Depending on your state, lenders might also require a legal separation agreement as proof that you are solely financially responsible for the asset.
How to keep the house in a divorce?
It's natural to want to keep the marital house. However, it’s important to acknowledge that you may not be able to maintain your pre-divorce lifestyle. Balance your wants and desires against your financial reality.
If you do decide to retain ownership, you will have more breathing room if you have paid off your mortgage. One way to buy out your spouse's portion of the equity is by offering an asset of equivalent value. You can also get a loan to buy out your spouse's share if you can afford the ongoing costs.
If you need more time to decide your next steps, you may negotiate for a deferred distribution of the house until certain conditions have been met. For example, you can ask the judge to allow you to remain on the property until your children have finished schooling to minimize interruptions to their daily lives. Another option would be to keep the existing ownership arrangement with your spouse as part of your settlement.
Talk to a CDFA
Keeping the house is almost always a financial question. To increase your chances of a positive outcome, your best option is to talk to a CDFA as early as possible.
Using their deep knowledge of finance and information gleaned from the client, a CDFA can create a realistic post-divorce plan that considers the client's assets, liabilities, and lifestyle.
Got any questions? Unsure about your next steps? Book a consultation today.