Can you Afford to Keep the Family Home After Divorce?
There are many important factors to consider before you decide to keep the family home.
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In many cases, one spouse wants to keep the house after a divorce and buy out the other spouse's share. The most common reasons for the desire to keep the family home include stability, keeping the children in the same school district, attachment to the house or neighborhood, and/or a perceived inability to afford comparable housing.
However, many divorcing spouses fail to consider the long-term financial costs of keeping a home post-divorce, such as property taxes, maintenance costs, potential dips in the value of the home, and how paying for a home with just one income may impact funds available for retirement. These costs should be high on a list of considerations for anyone thinking about keeping the family home.
You should be sure to do your homework, so that you are armed with all of the information necessary to make this important decision. It's best to speak with an experienced family law attorney and a financial planner to determine whether keeping the home is truly in your long-term financial interests.
Determine the Value of the Home
You'll first need to find out the current value of the house. A realtor can usually provide an estimate of the fair market value at no charge. Fair market value is the amount that you can reasonably expect to get if you sell the home. This number can be used for planning purposes. However, this number will not be exact and may be artificially inflated. To determine a more exact figure, you can obtain a certified real estate appraisal, usually at a cost of $300-$500. This should be done in cooperation with your attorney.
Once you know the value of the house, determine the present equity. Generally speaking, this is the current value of the home minus the debt against the house (e.g., first and second mortgages and home equity lines).
In Pennsylvania, if you decide you want to keep the house as part of the overall divorce settlement, you can generally subtract theoretical costs of sale (what it would cost to sell the house on the open market to a third party) to determine the value for the purposes of equitable distribution.
For example, a realtor typically charges six percent for his or her fee, and the transfer tax (outside of Philadelphia) is usually one percent of the sale price. Therefore, if a house has a fair market value of $100,000, for the purposes of equitable distribution, it may be valued at $93,000 ($100,000 value minus $6,000 realtor commission and $1,000 transfer tax).
Determine the Value of Each Spouse's Equity
If you decide to keep the home, you'll have to pay your spouse his or her share of the present equity. If you and your spouse decide to sell the home to a third party, you'll have to agree on how to split the sale proceeds between the two of you.
If you and your spouse can't agree on a buy-out amount or on how much each of you should receive from the sale proceeds, you'll probably end up in court, where a judge will decide using principles of “equitable distribution.”
Pennsylvania courts divide property using "equitable distribution," which means property is divided equitably (fairly) between spouses, not necessarily equally (or 50/50) as in community property states.
For more information on how property is divided in Pennsylvania, see Pennsylvania Property Division FAQs, by Kristine Calalang.
Courts can consider a variety of factors in determining a fair division of property. Courts must also take into consideration either spouse's separate property claims. Because property, including home equity, is not automatically split 50/50, the ultimate division is a bit unpredictable. This provides more room for argument between divorcing spouses about who should get what.
Determining an equitable distribution and analyzing separate property claims can be complicated. If you are faced with these issues in your divorce, you should contact an experienced family law attorney for help.
Refinance the Home
If you decide to keep the house, and can agree on a buy out amount with your spouse, the next step is to deal with the present mortgage.
Generally, the mortgage will have to be refinanced into your name alone. That means you will have to qualify for the refinancing. You can begin talking to various lenders to determine if you would be eligible. You may also need to borrow more of the equity in order to buy out your spouse’s share. This can only be determined by an overall evaluation of the entire equitable distribution scheme. While it is a good idea to preliminarily investigate different mortgage options, you should not apply for a mortgage until you are ready, as applying for too many mortgages can affect your credit report.
The decision whether to keep or sell the house should be made as a part of the overall global settlement. Consider the assets and debt you expect to obtain in the divorce settlement, your anticipated income and any anticipated support you may receive (alimony or child support). Also consider the tax effects, such as the mortgage interest deduction, which may decrease your tax burden and therefore increase the amount of your income available to you.
If you cannot comfortably afford the housing expenses, it might be best to consider selling the house and replacing it with something more affordable. Take your time with this decision and utilize all of the resources available to you: your lawyer, accountant, financial planner, and a trusted friend or family member who is knowledgeable in these matters.
Updated by: Lina Guillen, Attorney