How to Keep Your House in the Divorce: A Step-By-Step Guide

How to keep the house in a divorce: Take it step by step

Before continuing down this path, it’s important to take a deep dive into your finances to determine if you qualify to refinance by yourself.

“When one spouse is attempting to keep the house, it’s important to remember that you can’t qualify for as much as a single person,”  advises Dawn Fore, a top agent in Houston, Texas, who is a trained divorce specialist.

Step 1: Evaluate your finances

When going through a divorce, people often make the mistake of keeping a house they cannot afford because they don’t anticipate the actual cost of owning and maintaining the home on their own.

“Can you pay the mortgage, property taxes, homeowners insurance, and maintenance? There are many hidden costs that homeowners incur,” says Denise Erlich, an Illinois attorney who specializes in divorce and family law. “You should not simply be comparing the monthly mortgage to the cost you would pay to rent a residence. Utilities are probably two times the cost in a house than an apartment.”

You don’t want to give up your rights to other assets to secure the house only to find out that you can’t afford to keep it.

If you have a mortgage on the property, you have to prove to the court that you’re financially stable enough to pay for the following:

• Mortgage
• Repairs
• Taxes
• Upkeep

There are other things to consider beyond your ability to secure the home from your ex and prove your financial stability. Even if keeping the house is a viable option for you, it might not be the best financial move.

What are you willing to sacrifice to keep your home in the divorce?

You’ll have to decide what you are willing to give up in exchange for keeping the house. You may have to pay tax on some capital gains you make when you eventually sell the home, and that amount of tax burden might eat up an unexpected chunk of your equity.

Here is an example of how the capital gains tax exclusion might work for a married couple:

• You and your partner sell your house for $517,200 profit (that’s $517,200 over what you initially paid for the house) before or during a divorce.
• You’ve both lived in the home as your primary residence for at least two of the five years before the sale.
• Up to $500,000 ($250,000 each) is typically exempt from the sale of your home.
• Therefore, capital gains tax will be owed only on the $17,200 that exceeds the exemption limit.

If you decide to take the house in the divorce, this is how the capital gains tax exclusion might work for a single homeowner:

• You sell your home for $500,000 profit.
• You can typically exempt $250,000 if you’ve lived there for two years before selling.
• You will likely pay capital gains tax on the remaining $250,000.

(Note: The exclusion may be reduced if you purchased the house less than two years before the sale. Also, the five-year period can be extended if either spouse is actively serving in the military, depending on the circumstances. Always consult with your financial advisor or tax professional to determine what’s best for your situation.)

Another potential consequence is the assets you might exchange to offset the house price.

Step 2: Decide on the best way to pay for it

There are a few ways to pay for the home post-divorce. You could buy out your ex’s equity with your own assets, or you could try a cash-out refinance, which would release your ex’s equity and allow you to remortgage it, along with the remainder of the mortgage. Of course, you’ll need to qualify for the mortgage on your own.

Let’s take a look at how you might pay for the home in three different scenarios:

• If the house is paid off
• If you still have a mortgage but have some equity
• If there is little to no equity in the home

How to keep the house in a divorce if it is paid off

When you divorce, the home is likely the most significant and most valuable joint asset controlled by your state’s division of property laws. The court typically divides the equity in the house.

When you want to keep the house following a divorce, you may need to use your other assets to offset your ex’s share of the equity in the home.

Here is an illustration of what that means:

Suppose you and your ex have $300,000 equity built into your home. You decide you want to keep the house, and your ex agrees to let you keep it. In this scenario, you will typically be responsible for paying the $150,000 to your ex for their share of the equity built up in the house.

If you do not have enough cash to offset the cost of the home outright, then you may need to give up your claim to other marital assets, which can include, but are not limited to:

• Brokerage or investment accounts
• Different types of personal property
• Reduction in alimony
• Retirement accounts
• Vacation homes
• Vehicles

When you choose to offset your ex’s half of the existing equity in the home, it doesn’t remove their name from the mortgage or deed. You will need your ex to sign a quitclaim deed to remove their name from the property.

Another thing to consider is that you may not have enough assets to offset the home’s value. If that’s the case, you’ll need to secure a loan to pay your former spouse their share of the equity.

If you decide to get a loan, make sure you have enough cash to cover the loan payments, taxes, insurance, and repairs for the house.

How to keep your house in a divorce if you still have a mortgage

When there’s a mortgage on the home, keeping it is more complicated. In many cases, the simplest way to keep the house in a divorce if it still has a mortgage is to refinance.

The best-case scenario is for you to refinance and remove the mortgage from your ex’s name altogether. You’ll need to qualify for the mortgage on your own, so make sure to have all your financial ducks in a row.

Here again, if you don’t have the cash to pay for the house outright or other assets you can leverage, you will probably need to refinance just to pay your former spouse’s half of the existing equity.

Here are some things to consider when refinancing:

• You’ll be refinancing for the existing balance of the original loan.
• You’ll need to add your ex’s half of the current equity to the actual loan total.
• You’ll need to qualify for the larger loan with your income alone.

In general, lenders cap refinancing a mortgage at 80% of the home’s total value. If your debt and your partner’s equity combined push you past that cap, you may not qualify for the mortgage on your own.

Here is an example of what that means:

Suppose your home’s value is $600,000, and your existing mortgage debt is $400,000. Your current equity is $200,000 (the total value minus the total mortgage debt). Your ex’s share is $100,000, or half of the total mortgage debt.

As a result, you need to refinance for a $500,000 mortgage (existing debt + ex’s equity share). But your lender caps the refinance amount at 80% of your home’s value, or $480,000.

In this scenario, your options will be to:

• Secure an additional $20,000
• Negotiate with your former spouse to accept $20,000 less
• Not refinance the house

How to keep the house in a divorce if there is little to no equity

Do you want a home with little to no equity? Why?

Maybe you’ve decided that it’s the right choice for you. One word of caution — don’t let your emotions control this critical financial decision.

You can negotiate with your former spouse to keep the mortgage the same with both your names on the title or deed. But, you must dictate who is financially responsible for the mortgage payments and other expenses that may arise.

Keep in mind that if a payment is missed and both of your names are on the mortgage, the lender views both parties as equally responsible. Consequently, missed payments negatively impact both your credit scores.