In a divorce, there are often a lot of assets, but none quite so big (or emotional) as the marital home. Most women who come meet with me have really strong feelings about what they’d like done with the house. Whether they want to keep it, sell it, are hoping for a short sale, or something else, it’s important to deal appropriately with the house.
Sure, there are a lot of assets tied up in retirement, too, but in many ways, in Virginia at least, dealing with retirement is easy. In some ways, dealing with a house is easy, too—after all, we’re looking at how the property is classified and then dividing it—but not quite as easy.
How is property classified in Virginia?
There are three different classifications of property in Virginia: separate, marital, and hybrid. Once we know exactly how a piece of property is classified, it goes a really long way towards helping us figure out how to divide it in divorce.
Property is separate when it was earned, purchased, or acquired prior to the marriage. Property can also be classified as separate if it was acquired during the marriage, but came either from (1) a gift from someone other than your spouse, (2) an inheritance that was given directly to one spouse and not to both spouses jointly, or (3) a personal injury settlement or something similar. Property that is classified as separate isn’t subject to division in the divorce at all, since it belongs exclusively to one party or the other.
Property is marital when it was earned, purchased, or acquired during the marriage. If it was bought and paid for with marital money, it’s marital property. And, basically, it’s marital money if it was earned during the marriage—so it doesn’t matter whether it came from “his” paycheck or “your” paycheck—that’s all marital. For marital property, it doesn’t matter whether the asset is titled in one party’s name exclusively or not. It just matters when it was purchased and how it was paid for.
Property is hybrid when it is part marital and part separate. We see this sometimes with bigger assets like houses or retirement accounts. If the house was purchased prior to marriage, but was then paid for during the marriage using marital money (whether for mortgage payments or improvements and general upkeep), it’s a hybrid asset. With a hybrid asset, there are often some sticky parts.
If he purchased the house prior to marriage and it’s his sole name on the deed, the court won’t be able to force him to give it to you. He could be forced to pay you your share, but not to sell it to you outright since he does have a separate interest in the home.
So, how does it work in real life? How do we divide the house in divorce?
We have to look first at how the property is classified. Most of the time, a house is purely a marital asset. We also have to figure out what the client wants to do with it—keep it, sell it, whatever.
I want to keep the home.
If you’re going to keep it and it’s titled in both names, you’ll have to refinance.
So, you’ll have to talk to a mortgage broker or someone similar to find out whether you’ll qualify to refinance. You’ll have to refinance for the existing mortgage balance, but you’ll also probably have to refinance his portion of the equity. He’s entitled to half the equity (assuming it’s a marital asset, of course), so probably the easiest way to pay him his portion if you don’t have the extra cash on hand sitting in a bank account somewhere (and, in my experience, very few do) is to roll that into the existing mortgage. Sure, your payments will likely increase (because you have the existing mortgage principal plus his portion of the equity), but you could keep it that way. And, hey, maybe the payments wouldn’t increase, because chances are that you’d refinance for a full 30 year term, so it may be that it’s long enough that you could keep your payments similar. Again, you’d need to talk to a mortgage person about your options there.
You will have to refinance, though, if both names are on the home, because you have to remove the other spouse from any liability on the home.
He wants to keep the home.
The same thing works in reverse. If he wants to keep the house, he’ll have to refinance to remove you from any liability on the home, and pay you back your share of the equity in the home in order to keep it.
That’s all well and good, as long as he has the ability to qualify for the refinance.
We want to sell the home.
Good. Easy. As long as there’s equity in the home, we should be able to sell it. All we would need to do is reach an agreement (or have a judge enter an order) regarding the sale of the home. We place it on the market, either at a mutually agreed upon asking price, at a price determined with the advice of a realtor, or on the advice of someone trained in valuation, and then determine how the proceeds from the sale will be split. Usually, proceeds are split 50/50, but not always—if, for whatever reason, someone has a greater share in the home than someone else (say, it’s a hybrid asset, and you sold your premarital condo to help cover the down payment initially), they may receive more from the proceeds.
Remember that selling a home is expensive. (Though, to be fair, so is a refinance!) Between broker’s fees and closing costs, you’re often looking at upwards of $15,000-20,000 or even more, depending on the value of your home. That will cut into the equity to be divided, so you should be prepared for a little sticker shock up front. There may also be some up front costs with maintenance and repairs. In most cases, those costs are split by the parties—it may not be a 50/50 split, sometimes we negotiate a pro rata split based on the incomes (so if he makes 90% of the income, he pays 90% of the repairs).
Other times, we’re able to negotiate that one spouse (usually the spouse that stays in the home pending the sale) is responsible for those expenses. Sometimes, we set a cap for the expense associated with selling the home. It’s pretty flexible, but you should be aware that this is a potential issue. There’s no equity in the home. In the worst cases, there’s not equity to divide. We see houses fairly often that are underwater. It’s not ideal. It’s a huge pain, actually, when what is supposed to be your biggest asset (or, at least, one of them) turns out to be a liability. Sometimes it happens unexpectedly; parties don’t realize how much it’ll cost them to sell, so even though they’ve got $30k in equity on paper, it really doesn’t amount to much once all the costs of sale are factored into the equation.
Other times, it’s pretty obvious that there’s nothing in the home. At that point, you’ll have to look into whether you’d prefer to sell (with the knowledge that you’d have to bring money to closing – a painful thought, especially for a divorcing couple), or attempt to short sell or foreclose on the home. Short Sales and Foreclosures It’s not ideal, but short sales and foreclosures do happen. You have to qualify, and usually that’s based on some period of lack of payment. If you’re looking into your options with the home, and short selling or a foreclosure is high up on your list of priorities, you’ll want to talk to a qualified mortgage professional to figure out what assistance you might qualify to receive, and how you’ll begin to move forward.
It’s almost always easiest to reach an agreement regarding the house rather than leaving the decision in the hands of a judge. That way, we can make sure to maximize the value of your home, and make sure that the division of the proceeds (and of the expenses associated with preparing it for sale or refinance) are handled in a way that makes the most of the assets you have on hand, and minimizes the inconveniences. It can be difficult, but it doesn’t have to be! For more information about the marital residence and your options, give our office a call at (757) 425-5200. We’re happy to help!