Keeping the House but Dividing the Equity
In many divorces, the principal, and sometimes only, asset is the marital residence. Couples typically purchase a residence with some money down and a mortgage that consists of monthly payments comprised of interest and principal. Over time, the part of the payments going toward principal increases and the part going toward interest decreases. This principal paydown of the loan combined with market appreciation results in a valuable asset that has to be addressed in a divorce case.
Soon after a divorce is filed, the spouses along with their lawyers create a list of all assets and all liabilities along with their values and balances. The value of a residence is the likely selling price of the house in the current market less the principal balance due on the mortgage secured by the house and less any other liens secured by house. The value of the residence is the “equity” in the residence or what a seller would receive if the house were sold and the debts secured by the house were paid.
Divorcing spouses often think, incorrectly, that in order to tap the equity in a marital residence, the residence must be sold. If the marital estate is large and other assets exist with values or balances at least equal to the equity in the marital residence, then one spouse may decide to keep the residence and the other spouse would receive another asset or assets of comparable value.
But if the equity in the residence is the only asset or the remaining assets do not equal the value of the equity in the marital residence, then the residence must be sold, right? The answer is not necessarily. Options include:
- Co-ownership. The spouses co-own the residence for some period of time and then sell the home at a specified time and divide the proceeds. The period of time of co-ownership is agreed by the parties and might be a few months or as long as some number of years. This option works only if the spouses have no need of the house proceeds and have other financial resources to pay their living expenses until such time as the house is sold.
- Payments Over Time. One spouse owns the residence and signs a note, maybe secured or maybe unsecured, in favor of the non-owner spouse equal to the non-owner’s spouse share of the equity. The owner spouse then makes monthly payments to the non-owning spouse until the non-owning spouse has received his or her share of the house equity. The non-owner spouse often prefers to have a “secured” note so that he or she can force a sale of the residence if the note is not paid as promised; however, this security interest would be subservient to the original mortgage lien against the house (meaning the non-owner spouse would be paid only after the mortgage indebtedness is paid).
- Owelty Loan and Payment. One spouse owns the residence and works with a mortgage broker or lender to obtain an owelty loan to pay the non-owner spouse a lump sum amount equal to the non-owner spouse’s share of the equity in the home. If the owner spouse can qualify for this type of loan, then the non-owner spouse receives his or her share of the equity within 45-90 days of the date of the parties’ divorce. Not only does the non-owner spouse get the entirety of their share of the equity in the home, the new loan incurred by the owner spouse is in the name of the owner spouse only. Under this option, the court awards the marital residence to one spouse and finds “that this property cannot be divided in kind without significantly impairing the value of the resulting portions and that a just and right division can be made without compelling the sale of the property.” The parties’ Divorce Decree “orders a partition of this residence homestead with an owelty award, properly secured, to equalize the shares.” The owner spouse signs a Real Estate Lien Note and Deed of Trust in favor of the non-owner spouse. Both parties sign a Special Warranty Deed with Encumbrance for Owelty of Partition. Thus, the community property (marital residence) is partitioned to the owner spouse and a secured debt against the residence is created in order “to accomplish a just and right division of the estate.” After the divorce is final, the owner spouse presents a certified copy of the Divorce Decree to the lender who then completes funding of the loan. The non-owner spouse receives his or her money at the closing and signs a release of lien.
When the equity in a marital residence is the largest or only marital asset, spouses should explore all options for dividing this asset by talking to a knowledgeable divorce lawyer, a certified real estate divorce specialist, and/or a top mortgage broker with experience in these situations. With the right knowledge, spouses can better make informed decisions about their divorce.
This post was written by Kristen A. Algert.