How is home equity split in a divorce?

Divorce isn’t just about emotional separation: It’s about financial separation, too, especially when it involves shared property like a home, the most valuable asset many people own. When a couple decides to part ways, one of the most challenging aspects is figuring out what happens to the home — and each party’s ownership stake, or equity, in it.

“It’s the coming together that is sometimes the hardest part,” says Stephanie Fields, a loan officer at Mortgage Investors Group, a mortgage lender based in Knoxville, Tenn. “In divorce situations, there’s generally adversity.”

If you own the home outright, splitting the equity can be relatively straightforward. However, things can get more complicated if the property has a mortgage or another lien, like a home equity loan. In a divorce, the ownership of the property and of the outstanding mortgage are two separate issues.

The options are many. Should you sell the home and split the proceeds? What about one spouse buying out the other? How about keeping joint ownership of the house for a specified time?

It’s a lot to sort through, but understanding the options, having a clear plan, and being open to compromise can make the whole process smoother.

How home equity is divided in divorce

“Equity” simply means ownership. So home equity refers to the portion of a property that’s owned free and clear: roughly, the residence’s dollar value, minus the outstanding mortgage or any other home-based loans/liens.

The division of that equity during divorce typically depends on various factors, including any prenuptial or postnuptial agreements, state laws and the couple’s specific circumstances.

If a couple buys a house together after marriage, it is considered marital property. In community property states, the home and its equity are typically split 50/50 between the spouses. In equitable distribution states, property acquired during the marriage is divided based on what is considered fair rather than being split equally.

If one spouse bought and owned the house before marriage, it’s usually considered separate property, and so that person generally gets to keep it. However, things can get a little more complicated if the non-owner spouse helps pay the mortgage, repairs, renovations or other expenses related to the home. In this instance, the house may be considered a commingled asset: While one spouse has ownership, the other spouse has a claim to some equity because of their financial contributions. Courts have also been known to take into account “sweat equity,” non-financial contributions a non-owning spouse may have put into a home (running, maintaining or working on it), especially if those efforts have helped the home appreciate in value.

All this means that “it’s not automatic that the house goes to that person [the owner],” says Renee Coleman, a certified divorce lending professional (CDLP) and loan originator with Cross Country Mortgage, a lender based in Cleveland, OH. Even if it does, the other spouse has a stake, and merits compensation for it — based on value changes during the marriage. Say “I bought the house for $200,000, but when you moved in, it was $300,000 and today it’s worth $500,000. [The courts] are only going to look at the increase in equity from the time you were married and in the home,” she explains.

Determine the value of the home

Most options for dividing equity in divorce involve first assessing the property’s value. This step is crucial because it determines home equity, the difference between the property’s market value and the remaining mortgage amount, if there is one. There are several ways to do this.

• A comparative market analysis (CMA) estimates the value of a home based on recent sales of similar properties in the area.
• A broker price opinion (BPO) is an estimate of the property’s value prepared by a qualified real estate agent or a real estate broker. Often used to set a listing price, it assesses the home’s conditions and can include a CMA.
• A home appraisal is an uninvolved, third-party determination of how much the property is worth. It’s done by a professional appraiser, according to certain criteria.
• Online valuation tools can also estimate your home’s worth. They’re not as accurate as a professional appraisal, though — more of a ballpark figure to get you started.

Whatever valuation measure you choose, experts say both parties must agree on the method, and to accept the results of it.

Options for splitting equity in divorce

Once the home’s value — and each partner’s stake in that value — is determined, you can move forward with a plan. While the variations are many, options for divvying up home equity in a divorce fall into three basic categories.

Sell the house and split the equity

“If you’re looking at it from a financial standpoint, a lot of times, it does make more sense to start fresh,” says Adam Coleman, a CDLP and branch manager at Loan Pronto, a mortgage broker based in Charlotte, NC. “Sell the house, split the equity, and then both people go their separate ways.” He calls this “the path of least resistance.”

“You don’t have to worry about trying to remove somebody from a mortgage,” he says. “You’re not trying to remove somebody from the title or ownership of the house. You’re not trying to negotiate what the house might be worth to determine who’s who is responsible for what type of equity. So it’s a little bit cleaner in some ways.”

After paying off liabilities like a mortgage and a home equity loan or line of credit (if there is one), the remaining equity is typically split between the couple according to their divorce agreement. However, with record home prices, high home loan rates, and rising rents, this option may be less desirable for divorcing couples nowadays.

“To get a comparable home to what you’re leaving, it’s going to cost that much more,” says Renee. “Prices of homes are going up and the interest rates are a lot higher. It’s a very real challenge right now. Even if you decide we’re going to sell the house and [each of us] going to rent, likely you’re gonna pay more in rent than you were paying for your mortgage.”

It’s also important to consider the broader financial implications of selling a house. The equity is divided between the two parties after any existing debts and costs to sell the home, like closing costs, are paid. Additionally, the sale of the home may trigger tax consequences, such as capital gains or transfer taxes, which should be factored into the decision-making process.

Buy out one spouse

Plan B: One spouse becomes sole owner of the home, compensating the other for their equity share in it — buying them out, basically.

If the home is owned free and clear and one party wants to keep the property, a quitclaim deed may be the only thing that’s required. The document releases a person’s interest in the property and removes their name from the title.

It gets trickier if the property still has a mortgage on it, though. The purchasing spouse generally can’t take over the existing mortgage, if it’s in the other spouse’s name or even if the couple took it out together. The reason? Most loans are not assumable, meaning they can’t be transferred from one borrower to another (and those that can be assumed still require the lender’s approval).  To do the buy-out option, a mortgage refinance would need to happen.

Refinancing is just like getting a brand-new mortgage; you’ve got to go through the whole application process again. It means qualifying for the loan with one income (though spousal or child support payments can be included), which may be challenging. Equally challenging: The remaining spouse has to come up with the funds to buy out the other spouse.

“If they don’t have enough equity in that home to clear the original mortgage plus pay off the ex-spouse what they’re wanting, then someone’s either bringing more money to the table or they default back to selling the house and just walk away with what they can,” says Stephanie.

Just like primary mortgages, home equity lines of credit (HELOCs) or home equity loans are typically considered part of the total debt against the home. If one spouse buys out the other, they likely would be responsible for refinancing these debts along with the main mortgage (possibly combining them into one mortgage) or paying them off entirely if possible.

Co-ownership of the home/deferred sale

When deciding how to split the equity in a divorce, going for a deferred sale and/or sharing ownership can be a practical solution, especially if children are involved. This arrangement allows one spouse, typically the one with primary custody of the children, to stay in the home for a specified period. Depending on the nature of the agreement, nothing may change with the home’s title and the financial responsibility for the mortgage.

“Maybe the kids have a couple of years left of high school and you don’t want to uproot them and move to a different area,” says Renee Coleman. “That’s the sort of the circumstance we see most often when both are going to maintain ownership of the house.”

In the face of rising mortgage rates, Adam Coleman says couples have gotten more creative with co-ownership agreements in the last few years.

“Let’s say the vacating spouse was on the mortgage,” he says. “They are willing to build into the settlement agreement that they’re going to remain on the mortgage for a year, two years or three years or however long it takes for the spouse staying in the house to refinance into just their name. This is done with the hopes that mortgage rates somehow drop ‘x’ amount of percentage points to get them comfortable with the refinance.”

This solution simplifies life, because it maintains the status quo. However, it’s crucial that a co-ownership agreement be a temporary arrangement, with a finite term, because it involves risks – especially for the vacating spouse. “The person that’s vacating the home, they’re still on the mortgage,” says Adam. “That mortgage payment is still tied to their credit report and their Social Security number. So if the person keeping the home misses a payment or goes into foreclosure – the vacating spouse’s credit would be drastically diminished at that point.”

To help prevent misunderstandings and disputes, experts recommend a legal agreement outlining each party’s rights and responsibilities regarding the property, including financial contributions and the process for selling or refinancing the home.

Final word on home equity and divorce

Splitting equity in a divorce can be tough, both emotionally and financially. Whether you decide to sell the house, buy out the other party, or agree to own it together, each option comes with a mix of pros, cons and hard choices.

Navigating the complexities of dividing home equity is best not to do alone.  Divorce attorneys and real estate agents can walk you through your options.  You might consult a certified divorce lending professional (CDLP), who is trained in the financial and legal aspects of divorce — particularly as it relates to real estate, mortgages and financing.

While hiring a pro may seem like an additional, unnecessary expense, it’s actually the opposite,  Adam Coleman points out: “When you have the right people who specialize in everything, it’s just more efficient.”