Divorce and the Family Home

For the spouse who wants to keep the family home, it is a sanctuary. For the spouse who wants to sell the house, it is a source of uncertainty. No matter which side of the issue you are on, the question of how the family home is distributed is a source of stress and uncertainty.

From a legal perspective, a spouse with a community property interest in the family home doesn’t lose that interest simply because he or she moves out. However, from a practical perspective, the loss of income to the in-house spouse can cause concerns regarding the home-related payments, as in, who will make the mortgage payment, property taxes, insurance, etc? For the higher earning spouse, the stress is similar. It’s one thing to pay for a house in which the family lives, it’s another to pay for two households who live apart. The spouse residing outside the former family home can be required to pay support, both child and spousal, so that the other parent may meet their needs and those of the children of the marriage. For many families, the solution is to sell the family residence. However, home equity buyout is another method and can occur in different ways.

Home equity buyouts by one spouse are typically reached by agreement where one spouse is ordered to borrow the amount necessary to obtain a loan to buy out the other. The issues related to a buyout of the house during divorce are similar to those related to its sale. Think of it this way – one spouse is selling the house to the other, except both spouses can skip the listing, marketing and showing of the property. The buyout of a house during divorce can occur in different ways. One common way is the spouses, through their lawyers, agree to use an appraiser everyone trusts. Once the appraisal comes back (assuming both parties agree to the price), that sets the fair market value of the house. From there, the mortgage and other encumbrances are deducted to determine the equity value. Assuming the spouses and lawyers agree on the community versus separate property issues, they will typically work together to come up with a buyout number.

For example, if a house is worth $1 million dollars and it has $500,000 owed on it, there will be $500,000 equity. Let’s further assume the house is community property and that is not in dispute. The spouses can then stipulate to a $250,000.00 buyout. A buyout doesn’t have to involve a cash payment, it can include an offset of other assets in exchange for the buyout or even an offset toward compromises reached on other issues (spousal support, attorney fees, etc.)

If you are considering a buyout, review the following:

1.  How will the buyout occur? Refinance? Loan modification? Offset? Personal loan
2. When will the buyout amount be paid?
3. If both spouses are on the mortgage loan, is there is a timeline by which the spouse being bought out must act as an obligor? (Consider that the loan prevents the out spouse from qualifying to purchase their own home). What happens if that deadline is missed? Would the house be sold? If so, what are those terms?
4. Does the mortgage company (bank) have any restrictions on refinancing, modifications, change of title, etc.?
5. What if there is no equity in the house?

In instances where the house has equity, the buyout process and that equity go hand in hand. But what happens when the house does not have equity? Can one spouse simply take over the property, or should it be sold because there is no positive value?

No equity homes sometimes present a greater challenge than those with equity. The lack of equity can lead to attachment of sentimental or emotional value or its use as leverage. For example, if the husband wants to sell the house but the wife wants to stay, the husband may insist on the house being sold unless he gets something else in return, even though the husband knows nothing will come out of the sale. You can probably figure out there are several scenarios where situations like this can be used (for better or for worse) in negotiations.

However, to determine which spouse should be afforded the opportunity to buy out the other spouse, the Court will look at which spouse has a greater percentage of time with the minor children. If one of the spouses has a significant period of time with the children, let’s say in this case the mother, Courts will accommodate mother’s desire to buy out father’s interest in the residence to keep the children in the family residence. However, as stated above, assuming father has a cognizable interest in the family residence, the mother must then qualify for a loan to purchase that interest.

After the 2008 financial crash, there were no more “No Qualification” loans and in order to achieve loan approval, so, among other things, spouses seeking to stay in the family residence must show an income to debt ratio sufficient to satisfy Federal guidelines. However, keep in mind one of the things a lender may consider when determining said spouse’s income to debt ration is support, both child, and spousal support.

So this article has the purpose of explaining the disposition of a family residence during divorce, but it should also act as a warning. In the above example, when applying for spousal support mother may use her need for income to qualify for a loan to stay in the family residence as a basis for higher support. The out spouse should be aware of this, and from the beginning let your attorney know you want the family residence to be sold. Keep in mind that Courts see children remaining in the family resident as “a good idea”. Also, keep in mind that if the spouse loses the family residence to sale, they may never qualify to buy another home.

So the warning is this – unless you want to risk the possibility of paying higher spousal support (not always the fact, but it’s been documented in at least one case), sell the family residence.