Divorce and the Marital Home

When facing divorce, it is common for one spouse to want to stay in the family home to minimize disruption in the lives of the children, or just to hold onto something familiar in the face of major life changes. While there are many emotional components at play, there are four factors to consider when deciding whether keeping the family home makes financial sense.

1. Current value and market conditions – The first step is to find out what the home is worth and get a feel for real estate market conditions. A real estate professional can help you evaluate your home against “comps,” or other recent sales in the area, but an appraisal may be the best determiner of your specific home’s value.

Don’t assume that you and your spouse will share in any equity or shortfall equally. A neutral financial analyst can look at your situation and determine each spouse’s rightful share. If you wish to keep a home with equity in it, part of your divorce settlement will involve buying out your spouse’s share. This may mean less cash up front, or foregoing some spousal support, which may make it difficult for you to afford to stay in the home.

Conditions may be ideal for your home to sell quickly and provide each of you an opportunity to take your share of the equity and move forward. If the home is “under water,” meaning you owe more on the mortgage than the home is currently worth, you may want to explore options like renting the home to a third party, or “birdnesting” where ex-spouses continue to co-own the home, rent small places nearby, and trade-off staying in the home with the children.

2. Cost of other options – You will need to determine if there are affordable options in your area that could meet your housing needs. Depending on the rental market, the cost of a similar space may be substantially more or less than your current mortgage payment. If you find you would need to downsize in order to afford a new place on your own, don’t forget to factor in moving and storage costs into your decision.

3. Taking a buyout may be more beneficial – In a buyout, the spouse who keeps the home pays money to the other spouse, either by refinancing the house and paying out cash equity, or by giving up a larger share of other assets or retirement accounts. Over time, these assets may prove more valuable than the home. There may also be tax advantages to selling your share of the home now versus selling it years later as the sole owner. A financial expert, such as a Certified Divorce Financial Analyst, can help you determine what is in your long term best interest.

4. Mortgage Qualification – You may think that you can afford to stay in the home on your own, but the mortgage company may not agree. To stay in the home, you will most likely need to refinance. A mortgage company will look at your credit score and other factors to determine if you qualify. Generally, you will be turned down if the mortgage payment is more than 28% of your gross monthly income, or if your total debt payments are more than 36% of your income.

The decision about whether to keep or sell the family home can be overwhelming, but being realistic about the financial implications can help make an emotionally charged situation clearer. For this reason, it may be wise to consult a neutral financial expert to help you make a sound decision.