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, making monthly payments consisting of interest and principal. Over time, the part of the payments going toward principal increases, and the part that goes toward interest decreases. This paying down 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. The value of a residence is the likely selling price of the house in the current market minus the principal balance due on the mortgage secured by the house and the value of any other liens secured by a 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 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.
So how is home equity divided in a divorce, besides selling the house? Options for dividing home equity in a divorce include:
- Co-Ownership: One option for dividing equity in a home in a divorce is 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 immediate need for the house proceeds and have other financial resources to pay their living expenses until such time as the house is sold.
- Payments Over Time: Another way of dividing home equity in divorce is through 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 their share of the house equity. The non-owner spouse often prefers to have a secured note so that they 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 debt is paid).
- Owelty Loan and Payment: When determining how to divide equity in a home when divorcing, you may also wish to consider a home equity loan. When divided property is handled this way, 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 equal to the non-owner spouse’s share of the equity in the home. If the owner spouse is able to obtain this loan, then the non-owner spouse gets their share of the equity within 45 to 90 days of the date of the divorce. The non-owner spouse receives their full share of the home’s equity, and the owner spouse’s new loan is solely under their own name. Under this option, according to the standard legal wording for such a ruling, 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 bring about 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 their 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 equity in a home in divorce 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 how to divide home equity in a divorce.
