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If your marriage is breaking up and you own a home, you will eventually need to divide equity as part of a divorce settlement. If your home has equity, there are a number of decisions you’ll need to make regarding who gets how much of the equity, how everyone will get their fair share, and what to do with the money once everything is said and done.
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Note from the Editor: This article’s content is solely based on the author’s opinions and suggestions. It might not have received approval from any of our network partners through reviews, commissions, or other means.
If your marriage is breaking up and you own a home, you will eventually need to divide equity as part of a divorce settlement. If your home has equity, there are a number of decisions you’ll need to make regarding who gets how much of the equity, how everyone will get their fair share, and what to do with the money once everything is said and done.
# Determine how much equity you have before your divorce
You must determine how much equity you have in your home before deciding how to handle it in a divorce settlement. Home equity is the amount that remains after subtracting any loans or liens from the value of your house. Here are the two methods most frequently used to determine home equity:
# Decide who gets the house in the divorce
Negotiate who will keep the house if you don’t intend to sell it. Before deciding which spouse inherits the house, there are some crucial financial questions to be resolved.
It can be unexpected to take on a house payment on your own if you were a two-income household; can you afford the monthly payment? You must be approved for a new mortgage based on your income and any debt you have after the divorce is finalized if the house will only be in your name after the divorce refinance.
Many professionals advise setting aside 1% of the home’s value annually for maintenance and repairs, but that is up to you. Consider purchasing a home warranty as additional protection against serious problems. When you become the sole owner, the additional $300 to $600 average cost might be worthwhile if something breaks.
If you are granted the home in a divorce, you might have to “buy out” your spouse’s share of the equity depending on how much equity remains after the divorce. Consider a cash-out refinance, also known as tapping additional equity above the balance of your current mortgage, if you don’t have the cash on hand to pay for the buyout. However, if you decide to sell the house in the future, you’ll make less money.
Just because the court assigns debt payments to a spouse, doesn’t mean the spouse will pay them. Will you still be responsible for the mortgage after the divorce is finalized? And if you are still listed on the mortgage and they continue to make late payments, the lender will still damage your credit. You can ask the court to have your ex-spouse pay you back if you decide to make payments to protect your credit.
# Decide how you’ll split the equity in the divorce
Where you live and how you currently own the home may matter, even though divorce attorneys typically divide the equity in a divorce as part of your final divorce decree.
THINGS YOU SHOULD KNOW
It’s a common misconception that transferring ownership of your home to an ex-spouse releases you from joint mortgage obligations. Even though your divorce decree may state that this is correct legally, if your ex-spouse or ex-husband stopped making mortgage payments after taking out the current loan with you, your credit may suffer.
# Determine if you qualify for a refinance divorce buyout
To pay your spouse’s home equity share if you want to keep the house, you might need to be eligible for a refinance divorce buyout, which is a cash-out refinance. If you and your spouse were approved for the mortgage together when you purchased your home, you may need to review the minimum mortgage requirements for various programs.
Maximum loan-to-value ratio. Your loan-to-value (LTV) ratio indicates how much you can borrow in relation to the value of your home. Most divorce buyout refinance mortgages let you access up to 80% of the value of your house. But if you’re a military borrower, you might be able to increase your loan with a loan supported by the U.S. government up to 90% of your home’s appraised value. S. Department of Veterans Affairs (VA).
Maximum debt-to-income ratio. Your debt-to-income (DTI) ratio is calculated by lenders by taking into account all of your debts, including the new mortgage payment. The Consumer Financial Protection Bureau advises a DTI ratio of no more than 43%. If it’s higher, you might have difficulty qualifying unless you have excellent credit or substantial cash reserves.
Credit score minimum. A conventional loan requires a score of at least 620. If your credit score is between 500 and 619, you might need a loan backed by the Federal Housing Administration (FHA).
THINGS TO KNOW
Your ability to use the income to qualify for a mortgage if you are receiving spousal support or child support may be limited. In most cases, you must demonstrate that you have received spousal support for at least six months and that it will continue for at least three years in order to be approved for a loan.
# Decide how to use the equity if you’re selling the house after your divorce agreement is final
You might have to sell your home if you can’t refinance following your divorce in order to protect your equity from a potential foreclosure. You will need to make some decisions based on how much money you net.
If your credit was harmed due to unpaid debt that your ex-spouse was accountable for, you might have to rent for a while while you build your credit. If the landlord thinks your credit is too risky, you might also need the additional funds for a rent deposit.
Do you plan to stay in the same state or city? If you plan to move, don’t forget to budget for moving expenses. Also, check out property taxes if you’re buying in a new state — they may be significantly higher or lower than you’re used to.
If you don’t use the money to buy another home, will there be any tax consequences? The income shouldn’t be taxable if you received $250,000 or less and lived in your home for at least two years before selling it. But if you buy out your spouse, continue to live there, and then sell the house later, you might have to pay capital gains taxes. Before your divorce decree is finalized, consult with a tax expert to prevent tax suprises later on.
If you were given debt after a divorce, it might be best to pay it off as soon as you can to improve your credit score in preparation for a future home purchase. Keeping your credit card balances at or below 30% of your total credit limit will typically be beneficial.
THINGS TO KNOW
Your lender may request legal documentation if you’re purchasing a home while going through a divorce to confirm any debt you must pay and whether you must also pay spousal support or child support.
Compare Home Equity Offers Property type:
Discover whether the interest on a home equity loan is tax deductible and the circumstances in which you can do so.
Study the specifics of a home equity loan vs. To choose the strategy that will best serve your financial objectives, use a home equity line of credit (HELOC).
If you have bad credit, getting a home equity loan will require more paperwork and cost more money than if you have good credit.
FAQ
How is home equity calculated in a divorce?
You must value your home in order to ascertain how much equity – or ownership – you have in it. subtract the outstanding mortgage balance, and. calculate your share of the remaining equity.
Can you use a Heloc for a divorce settlement?
Therefore, there’s a good chance a HELOC can aid in the divorce settlement payout even if you have little equity in your home.
Is my ex entitled to half the equity?
Dividing Equity After the value of the equity has been established, the spouses can agree on how to divide it. A 50/50 split is typically acceptable if both partners contributed equally to the mortgage they acquired after marriage and both worked during the marriage.
Can my husband get a home equity loan without me?
If one borrower is able to obtain favorable loan terms based solely on their creditworthiness, couples or co-homeowners are not required to obtain a home equity loan in both names. However, lenders may insist that the non-borrowing partner sign documents approving the loan.