If you’re like most middle class Americans, at one point in your life you pinched all your pennies and purchased your first home. You did your research on the area and the school zones, and you eagerly waited to find out how much you’d prequalify to spend. When you did find out, you were shocked. “I qualify for how much?!” If you’re anything like me, that was a pretty shocking (and sobering) moment. I’m no mathematician, but when I calculated out my monthly mortgage payment for a house that was in the top range of what I prequalified to spend, I was shocked that these crazy mortgage people thought I could afford so much house. Obviously, I really couldn’t afford the monthly payments! What on earth were they talking about? I couldn’t spend that much!
So, I did a little more research, and looked into interest rates and finally decided on purchasing a much more modest house with monthly payments that seemed a little more like something I could reasonably afford, while still being able to feed myself, pay my bills, maintain my car in good working condition, and have a little money left over for some fun. I was doing the responsible thing. I was living the American dream. The money I put towards my home would not only give me a place to live but, over the long term, provide me with a little extra financial security as the home slowly (but surely) appreciates in value. It was a big decision!
Whether you purchased your home before or during your marriage, you probably have a lot of questions about how the division of this valuable piece of property will be divided now that you’re contemplating divorce. It’s a good question, too, because a house is a complicated asset. It’s not like a table cloth or even a piece of furniture.
In this article, we’re going to talk about how property is divided in divorce and what options you have for how to handle your marital residence. We’re also going to talk about keeping the house, foreclosing on the house, and a few of the more common problems and pitfalls that I’ve seen come up in these types of cases, in order to prepare you as well as possible for what you may be up against when the time comes to sell your home. Read on!
So, how does property division work in a divorce?
Before property is divided between a husband and a wife who are about to go their own separate ways, it has to be classified. It doesn’t matter what kind of property it is; it’s all classified the same way. Dinner plates are analyzed the same way as your grandmother’s Waterford crystal glasses. The painting on the wall in the living room is lumped together with the power tools and golf clubs in the garage. Your home is added in there, too, for good measure, along with your linens, furniture, cars, boats, RVs, and napkin rings. Not to mention, your bank accounts and other pieces of intangible property (like your IRAs, stocks, bonds, mutual funds, and 401(k) accounts) also have to be classified before they can be divided. So, how is it done?
There are three types of property: separate, marital, and hybrid.
Separate property is anything that you earned, purchased, or acquired before your marriage. Since you weren’t married when you earned, purchased, or acquired the asset, it’s not divisible in your divorce. No matter how the property came into your possession, if you had it prior to your marriage, it is yours separately.
Any inheritance or gift you received that was given to you specifically (and not to both you and your husband as a couple) is also separate.
Examples: The car your parents bought you as a graduation present three years before your marriage is yours even after you separate and, eventually, divorce. The inheritance that you received from your grandmother is also your separate property, whether you received that inheritance before or during your marriage.
Marital property is anything that you earned, purchased, or acquired during your marriage. Because of your marriage, anything that you earn or buy during your marriage belongs to both you and your husband together, regardless of how the property is titled. Unless the property was a gift or an inheritance that was intended for you to receive alone (and not intended as a gift to the two of you as a couple), anything that you get during your marriage is divisible in your divorce.
Examples: If your husband purchased a car during your marriage, and titled it in only his name, it is still a marital asset, and will be divided between the two of you. If you received an inheritance from your grandmother during your marriage, and she made it clear that she intended you to have the inheritance alone, your inheritance is separate, and not marital. If you purchased and paid for a piece of real property during your marriage, it is marital property, and subject to division in divorce.
Hybrid property is property that can be classified as partly marital and partly separate. Usually, we see hybrid property in bigger, more complicated assets that require payment over a longer period of time. Houses, retirement accounts, and other similar kinds of property can sometimes be hybrid property.
Examples: If you purchased your house prior to marriage, but made payments on it with your husband during your marriage from marital assets, the house is a hybrid asset. So, how much is yours and how much is marital? Well, it all depends on how much of your separate money you invested from the beginning. Your down payment and any other separate payments you made on your own are all your own separate interest. So, if you paid for 25 years on your own, and then got married and the last 5 years of your mortgage you and your husband paid with marital assets, the house is primarily yours—usually, in those types of cases, you just buy out the marital interest of the party with less ownership in the property. As you can imagine, in that scenario, the marital interest would be very minor. If, on the other hand, you paid a down payment just before you marriage and made all the other monthly payments together, only the down payment (and, of course, any appreciation that can be attributed to your initial investment) would be your separate property.
So, what are my choices with my house?
Well, it all depends, first and foremost, on how the property is classified. Is it separate, marital, or hybrid? Based on our earlier discussion, you should now have a pretty good idea about who really owns the house. Probably, it’s either marital or hybrid, but, either way, it’s important to know and understand the distinction.
Obviously, you also have to look at whether there is equity in your home, and consider what makes the most financial sense for you in your particular situation. If there’s no equity in the house, you may want to ask yourself whether you want to hold on to a negative asset. On the other hand, if you can afford the monthly payments on your own, taking over a house with little or no equity, means that you wouldn’t really have to pay much (if anything at all) to take over your husband’s interest in the home. With a house where there is equity, it may be more difficult or expensive to refinance and take on the remaining mortgage balance and still pay off your husband’s half of the equity in the home. It’s always a cost/benefit analysis. Basically, with a house, you have four main options:
1. Sell the house.
2. You buy out your husband’s interest, refinance, and stay in the house.
3. Your husband buys out your interest, refinance, and he stays in the house.
4. Keep it and rent it out.
5. Foreclose or short sale.
Let’s look more closely at each of the options to discuss what may be involved.
Sell the House
Obviously, the first alternative is just to sell the house, especially if (1) there’s equity in the home (because that would translate into you walking away from the marriage with some cash on hand to set up your new life), (2) neither of you can afford the monthly mortgage payments on your own, and (3) neither of you is particularly emotionally attached to the home and don’t care to stay.
If the two of you agree to sell the house, there will be very few roadblocks. Still, it’s a good idea to talk to an attorney and a qualified real estate agent (in many cases, your attorney can recommend a real estate agent to you). Because you need as much money as possible to get your best, freshest new start possible, you’ll want to talk to both your attorney and your real estate agent about how to sell your house for maximum profit. You will probably need help figuring out what to list the home for, how to handle any repairs that need to be made before the closing date, and what your net proceeds will be from the sale of the home after the expenses are taken into consideration.
Remember that selling your house probably isn’t something that you do every day. With an asset this big, and so much at stake, it’s best to talk to a trusted professional as early as possible to get an idea about what you should do.
Negotiate a buyout
If you’re like a lot of women, you’re emotionally attached to your house. Not only is it a source of pride and the place where you’re able to relax, for a lot of people, your home is also the place where you raised your children. It’s a place with a lot of memories, so it’s special. If you’re feeling like you’d like to stay in the home, particularly if you’re worried about providing that very much needed stability for your children during the divorce, you’re not alone.
If, on the other hand, it’s your husband who is attached to the house, has future investment plans for the property, or can afford to stay, that’s not unusual, either. The process is the same, regardless of who plans on taking over control and ownership of the house.
In a buyout, one spouse give up his or her interest in the marital home in exchange for money. In order to do this, you’ll have to refinance your loan, combining what you still owe on your mortgage with the other party’s marital interest. The cash proceeds from the loan are then what you use to “buy out” your spouse. It’s not like you have to have the cash on hand to buy him out (though, if you did, that would be great); it’s just that you have to be able to qualify for the loan.
So, can you really afford it? Before you agree to refinance, talk to a financial professional. You may choose to talk to a CPA or a mortgage banker to determine whether (and how much) of a loan you might qualify for. Again, just like when you were buying the house, you may want to think critically about whether it’s really realistic to take on a loan at the top of what you qualify for. Ask yourself what you can realistically afford to spend each month, and what you’ll still have to spend on other things—like your car, gas, groceries, utilities, and things for your kids.
Better yet, don’t agree to refinance, even if that’s what you want. If you and your husband are negotiating a separation agreement, agree that you have the option to elect to refinance. Then, if you can’t refinance, or don’t qualify, or, for whatever reason, choose not to refinance, you haven’t breached your agreement.
“I’ll be able to afford to refinance or buy a new house, because I’m receiving child and spousal support!”
Remember that mortgage bankers have specific rules about what they can accept, too. If you’re planning on buying a house with your child support or spousal support income, most mortgage bankers will want to see that you’ve been consistently receiving that amount for certain period of time (usually six months). Remember the last time you bought your house? Mortgage lenders are kind of obnoxious. They want you to explain absolutely every single transaction that shows up in your bank account, and if your child and spousal support payments are intermittently received (which might indicate that your husband is struggling to pay it, and therefore may default later on), or are paid in different amounts each month (like, if you said that because he paid for school supplies you’d let him take half off this month), it’s going to look like your payments aren’t consistent and can’t be relied upon. It doesn’t matter whether you’re planning on buying a house or refinancing and qualifying for the loan on your current house, you’re going to have to satisfy a mortgage lender that you are capable of handling the mortgage. Make sure your child and spousal support payments are timely received, and consistently reflect the same amount.
“I love this house; I’ve just got to keep it!”
I get it. You love your house. I love mine, too, and it would be hard for me to walk away, no matter what happened. Still, just like when you bought your house, you have to step back and look objectively at the situation. Is the house really worth the continued investment?
A lot of times, we recommend that our clients, before re-purchasing their homes (because that’s what you’re doing when you negotiate a buyout and then refinance the remaining balance of your mortgage), hire someone to do a home inspection and a title search.
I know, I know. It sounds crazy, right? But so many things that can go wrong with a house are invisible until you conduct a home inspection. Before you take on a lot of debt on your own, you should double check and make sure that everything checks out. It’s probably fine, but we’ve heard some really terrible horror stories about cases where it wasn’t fine, and things like that can ruin people financially. What if there’s a crack in your foundation, and it’s going to cost tens of thousands of dollars to fix? What if there’s a tax lien on your property that you didn’t know about? Sure, you’re attached to your house, but you’re not so attached that you can totally turn a blind eye to things that are so obviously possibly financially ruinous.
You wouldn’t buy a new home without a home inspection, so why would you agree to buy your own without an inspection and a title search? You wouldn’t, and you shouldn’t. Make sure that everything checks out before you obligate yourself to make a long term decision that you might regret.
Not only that, but, for the repairs that do have to be made, when you find out exactly what they are, you can enter into an agreement with your soon to be ex husband about how the repairs will be made (and paid for). It’s pretty customary that sellers will fix up their house after they get the verdict from the home inspection guy, so why should your husband get to skip this step? (In reality, what will probably happen is that you’ll reduce the amount you have to pay him for his interest in order for him to cover his half of the necessary repairs. It’s possible that he could just pay out of pocket, but it’s unlikely.)
Keep the house
It’s unusual, but sometimes couples choose to keep their house, even after their divorce. Usually, we see this when the property isn’t in a position to sell for top dollar, or when the couple has a longer term investment strategy that they plan to maintain even after their divorce. Again, it’s super unusual, but it does sometimes happen.
In situations like this, it’s important to have a carefully thought out separation agreement that spells out all the terms, arrangements, and contingencies relating to the property. Who will pay for maintenance and repairs? Utilities? Taxes? Fees? Do you plan to have a renter or use a property management agency? At what point will you decide to sell? Do either of you have the ability to perform maintenance and repair work yourselves? How will you determine who your listing agent will be? What happens if you don’t agree about what to do with the house? It’s important to make sure that your separation agreement takes all these possibilities and eventualities into consideration, and comes up with solutions that address your concerns before they arise and create friction.
If you plan to keep your home after your divorce, you’ll probably want to talk in some detail with your husband about your long term plans for the property. Spell out certain conditions, and make sure you both understand each other. Talk to an attorney, if possible, to discuss ways of drafting your agreement so that you’re as protected as possible in the event of some unforeseen circumstance.
Beware, though. If you and your husband keep the property, it may affect your ability to qualify for financing on another place to live. The laws have changed since the housing market crashed, and it’s more difficult than ever to get into a new home, particularly if you have an old one with a mortgage still lingering around in the background. You may be required to have as much as six month’s worth of reserve mortgages for BOTH properties in order to close on a new one, even if you otherwise qualify for the mortgage. (The mortgage companies have been burned before by people who claimed to want to rent out their old homes and then ditched them and let them go into foreclosure once they had secured their second home.) Ask your mortgage broker for details, and he should be able to point you in the right direction if you’re considering keeping your old house but still plan to purchase a new one.
Again, the lesson is that you should make sure you talk to all the required professionals (or negotiate an agreement that is conditional) BEFORE you sign something that obligates you to keep the house or refinance it. In any case where you’re expected to remain financially on the hook, you should do everything you can to talk to competent professionals about whether this course of action is truly advantageous for you. Either negotiate an agreement that gives you an option to exercise this course of action (or not, if it might be financially damaging in some way), or refuse to sign an agreement until you’ve had the opportunity to talk to an expert about your options.
Foreclose or short sale
Obviously, no one wants to foreclose on their house, or be forced into a short sale. I don’t present this to you as an option or a possibility (because I couldn’t, in good conscience, recommend that you take an action that would be so obviously detrimental to you in the long run), I just tell you because, theoretically at least, if you’re wanting to get rid of a piece of property, this is technically one way to accomplish that goal. I’ve heard of people leaving their houses to be gobbled up by the lending banks, especially in cases where they owed dramatically more than the house was worth, but in most cases this is a terrible option that can have crippling short and long term consequences.
If this is an option you’re considering, it’s a good idea to talk to an attorney or financial professional before you take any steps that you can’t take back later. It’s an option, of course, but you should be sure you’ve tried to exhaust every other possible means before you take such a drastic step.
So, what should you do?
Ultimately, the choice is totally up to you. Whether you choose to sell the house, negotiate a buyout, purchase the home yourself, keep it jointly, or foreclose or short sale on the property, you should be sure that you’ve talked to a qualified professional who can give you advice on what may be best for you in the long run. Of course, there are no crystal balls, so it’s impossible to know what may happen over a period of time. All you can do is make the best decision possible under the circumstances and know, at the end of the day, that you did the best you could with the information at hand.
You should look carefully at your financial picture, and come up with a solution that addresses as many of your concerns as possible. Leaving emotion out of it, do the best you can to look objectively at the facts and take your long term financial goals into consideration. Make sure you avoid the common mistakes and pitfalls I’ve indicated here, and don’t be afraid to ask for help if you need advice and guidance.
The marital home is probably one of your biggest assets, so you’ll want to make sure that, whatever happens, you’ve done the best you can to provide for yourself over the long term. If you’re concerned about what to do with your home or have questions about what might be the best option for you under your specific circumstances, please feel free to give our office a call at (757) 699-5796. We’ll be more than happy to set you up with an appointment with one of our licensed and experienced Virginia divorce and custody attorneys, who can help give you advice on how to move forward.