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A Step-By-Step Guide on Buyouts in Divorce

By
Real Estate Agent with RE/MAX Executive Realty 91362

Navigating the turbulent waters of divorce can be straining, especially regarding valuable shared assets like a house. If you're at this crossroads and the thought of selling your beloved home feels more detrimental than the split, buying your spouse out might be a viable option.

In this comprehensive guide, we'll walk you through the process. You will learn each step to help you maintain ownership of what may be more than just a building.

Welcome to clarity amidst chaos. Let's unravel how to buy your ex-partner's stake in your house, gain sole ownership, and secure peace of mind during this challenging time.

To buy your spouse out of a house in a divorce, there are several options you can consider. One common approach is offering a lump sum payment to your spouse for their share of the asset.

Alternatively, you can propose an equitable exchange by offering something of equal value for their share. Refinancing the mortgage under your name alone might also be an option, depending on equity and credit score factors.

If these options are not feasible, you can create a buyout agreement where payments are made over time to purchase the spouse's holdings. It is crucial to consult with an experienced divorce attorney to navigate property division and other issues effectively during a split.

From three decades of experience as a Realtor working with couples going through a divorce, there are many critical decisions to be made.

One of them is how the house will be split when the marriage ends. When one spouse wants to remain in the home, a buyout is usually the best option. Maximum Real Estate Exposure is an excellent resource discussing splitting the house.

Let's examine everything you should know.

Noteworthy Statistics on Marital Separation

  • The American Psychological Association reports that approximately 40 to 50% of married couples in the United States divorce. This leads to numerous property division cases each year.
  • According to a study by the American Academy of Matrimonial Lawyers, 62% of their members cited an increase in postnuptial agreements over the past three years. It testifies to the rising trend of spouses seeking alternatives, such as buying out properties during separations.
  • A U.S. Bureau of Labor Statistics survey shows homeownership drops by about 10% for men and more than 15% for women after a divorce. It indicates the prevalence of selling or buying out a spouse's share in properties during divorces.

Buying Out Your Spouse: Legal and Financial Factors

Divorces are often legally and financially challenging, especially regarding property division. If you're thinking of buying out your spouse from a house in divorce, there are several critical legal and financial considerations you need to take into account.

Even in amicable divorces where the parties choose not to have divorce lawyers, it is prudent to have mediators and financial advisors. From experience these professionals provide invaluable assistance.

Financial Considerations

One significant financial factor to consider is the equity in the house. The equity is calculated by estimating the home's value. You then subtract the outstanding mortgage payments and any applicable debts or liens against the property.

For example, if your house is valued at $400,000, with an outstanding mortgage balance of $200,000, and $50,000 in debt is secured by a lien, your share of accumulated equity would be $150,000.

Another financial consideration is whether you can afford to buy out your spouse. In many cases, couples may not have enough cash to purchase their ex-spouse’s share of ownership outright.

Refinancing the current mortgage could be another way to raise money for a buyout. It allows one party to remove their name from the loan while retaining property ownership.

However, eligibility for refinancing depends on income, credit score, and home equity position. Therefore, reviewing your finances before deciding which route to take would make sense.

Let's say that John purchased a home with his wife for $500k. They each contributed $100k as a down payment to acquire the property, with a remaining mortgage balance of $300k.

The post-divorce valuation shows that the house has appreciated up to $700k. John owes his wife 50% of the difference between her original investment (the initial down payment) and her share of the current market value (her half part).

Therefore, John should pay his wife ($700K x 50%) - ($100K x 50%) - $300K = $50K to buy out his wife from the house.

Appraisal or Real Estate Agent Property Evaluation

When going through the breakup of your matrimony, it is vital to work with a Realtor with experience in divorce.

As a real estate agent, I am often asked by couples going through a marital separation to evaluate the market value. Sometimes, the couple knows they will be selling the house.

Other times, it is up in the air, and a buyout is under consideration. The value will be calculated by compiling local comparable sales and then analyzing the data.

It will be compiled into a comparative market analysis. A real estate agent should provide a suggested listing and likely sale prices. The data should make sense to both parties.

Divorcing spouses will also get an appraisal by a licensed appraiser. An appraiser will determine the value much the same way a Realtor does.

Legal Considerations

Before you buy out your spouse's share of the house, there are a few legal aspects to consider. Both parties should be transparent about their finances, as it will impact the calculation of the buyout price.

Establishing the buyout process and division method is essential to avoid conflicts regarding future sales and ownership claims.

For instance, if both parties agree that one spouse will own the house and rent a portion to the other, it would be wise to settle on rent terms beforehand.

You should also ensure that any agreement reached complies with state-specific laws and regulations.

Obtain legal assistance from a professional experienced in family law in your state to guide you through this process.

Calculating the Buyout: Setting a Fair Purchase Price

Determining the buyout price is essential for mutual settlements. Since establishing an industry benchmark is unfeasible for calculating mortgage amounts, creating your personalized formula based on locality and home characteristics might prove beneficial.

Calculating the size of each party’s interests in the house begins with determining its appraised value. You'll also figure in any outstanding mortgage balance per spouse’s obligations at divorce.

Equity — realized by dividing the appraised value by mortgage obligation — is distributed between both parties based on their marital settlement agreement.

For example, suppose House ABC has an appraised value of $500k. You have paid off $200k but still owe $100k in mortgage loans. The equity in House ABC would be $400k ($500k-$100k).

Suppose you divide that in half for two spouses interested in acquiring equitable shares of assets during divorce proceedings. In that case, each receives an interest in those assets valued at $200k (representing 50% of House ABC’s equity).

Another vital factor is costs or improvements made since buying the home. They must also be considered when determining fair market value for a home during the divorce. As such, it should also be evaluated when setting the buyout price.

As mentioned, it's wise to consult a professional appraiser or skilled Realtor to ensure your estimate is reasonable and unbiased.

Think of the house as an airplane. The pilot knows how to take off (buying out during a divorce). However, they must determine their landing location (calculating a suitable buyout price).

They rely on the ground crew, maintenance personnel, and weather forecasters (appraisers, attorneys, and real estate agents) to determine ideal conditions for takeoff and landing.

Finalizing the Purchase: How to Proceed with the Lender

You must finalize the sale once you and your spouse agree on a purchase price. Typically, this means obtaining a new mortgage loan or modifying your existing mortgage loan.

Reviewing the current loan agreement meticulously is essential since specific clauses could impact the selling process. A loan assumption document will be signed if one spouse assumes the existing mortgage without refinancing it into a new name.

Reach out to your lender for guidance on how to proceed based on your unique situation. You'll need to fill out an application. Mortgage lenders expect documentation like income statements and credit reports as part of the underwriting process.

Your lender may require a new appraisal or use the original home appraisal report to determine its current value.

Say you need $150k to buy out your spouse's equity share in the house, and you currently owe $200k. You'll need to refinance through your lender for at least $350k ($200k + $150k). Remember that typical lending requirements apply even if it's from an initial home purchase.

Closing costs include title insurance, appraisal, application, and attorney fees. Before closing on the property, double-check that all documents are accurate. Missing anything could lead to errors or delays in the transaction.

With an understanding of what is involved in finalizing purchases with a lender, let’s focus on alternatives to buyouts.

Other Options: Alternatives to a Buyout

Perhaps buying out your ex-spouse from a shared residence isn't practical for you or them, given financial constraints. Other potential solutions don't involve holding onto the property or buying them out.

Sell The House

One potential solution could be to sell your home altogether. This option might be best if neither party can afford mortgage payments alone, relocating to another area, or downsizing.

In my experience, it is the most popular option when no children are involved. It behooves first-time sellers in these circumstances to understand the importance of real estate marketing.

The profit could be split in a way specified by the divorce agreements, given specific legal obligations have been met.

Refinance The Loan

Another option could be to refinance your mortgage under your name only and adjust the loan terms accordingly. You'll need to have the financial capacity to qualify for the refinancing without the assistance of your ex-spouse's income.

Think of it like choosing ingredients for a recipe. Various recipes you can use might match your current circumstances better than others.

Keep The House For Some Time

One also has the choice to maintain joint property ownership after divorce until a suitable timeframe presents itself. It could allow both parties time to evaluate their options before making significant decisions while sharing liabilities and responsibilities.

Consider speaking to impartial financial or legal advisors who can guide you through complex situations with greater confidence and ease.

Conclusion

There are several choices for dividing up marital assets in a divorce. It always behooves the parties to work through things amicably.

With significant discourse, the only people who benefit are the divorce attorneys.

Posted by

With three decades of experience, Bill Gassett is an authority in the real estate sector. Bill writes informative articles for numerous prestigious real estate sites to help buyers, sellers, and fellow real estate agents. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Placester, Realty Biz News, Credit Sesame, and his own authority resource, Maximum Real Estate Exposure. Reach out to Bill Gassett for his real estate, mortgage, and financial expertise.

Comments(2)

Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

Wow this was an excellent post ! I both Liked it and Bookmarked it ( to revisit it again

Jan 24, 2024 08:39 AM
Bill Gassett

Thanks Michael J. Perry 

Jan 24, 2024 12:58 PM
Richard Weeks
Dallas, TX
REALTOR®, Broker
Great information, thanks for sharing.  I hope you have a great day.
Jan 28, 2024 04:49 AM