Buying Out a Mortgage During Divorce
What to do with the family home can be an incredibly emotional question to answer during a divorce or separation. Many important memories are associated with a family’s home, and losing easy reminders of milestones in a child's life can be distressing to parents. But it's not just losing physical connections to past memories that parents worry about. Parents may also fear that moving children away from familiar surroundings can impact their adjustment to life in two houses.
If parents co-own their family home, one option pursued by some is a buy out of their co-parent's share of the property's equity, as opposed to selling the house and moving out. Doing so can be a complicated process, however, and will not be the best solution for every situation.
Deciding whether a buyout is the best choice
A buyout won't be the right solution for every family, so it's important that parents do the research before pursuing this option. Gathering answers to the following questions is the first step when determining whether a buyout is a financially sound decision for your situation.
What's the buyout amount?
Calculating the buyout amount is an essential first step when determining whether a buyout is a viable option. The buyout amount roughly equates to half of the shared equity that you and your co-parent have in the home. Equity can be determined by subtracting the remaining balance of the current mortgage from the appraisal price of the home.
If you and your co-parent agree on the value of your home, you may be able to move forward with your buyout without the help of a professional appraiser. On the other hand, if you do disagree, the assistance of a professional can help move things forward. In cases where co-parents cannot agree even after a professional appraisal, court involvement may be necessary. However, this can greatly increase the overall cost of divorce proceedings, so parents should strive to work together to come to a solution.
Can you qualify for a mortgage on your own?
Buying out a co-parent's share of a property's equity requires that you be able to qualify for a home loan on your own. Collect all necessary credit and financial documents, and consult multiple loan officers as early as possible to determine the loan amount for which you can qualify. The loan must typically be able to cover the remaining balance on the current mortgage plus the buyout amount that is owed to your co-parent.
Can you afford it?
Qualifying for a home loan doesn't mean that you can comfortably afford to take one out. What may have been doable in a dual-income household may become prohibitive with only your own earnings to rely upon. And it's not simply covering the principal, interest, taxes, and insurance (PITI) that you need to worry about. You should also assess whether or not you're able to save enough money for any inevitable repairs and upkeep that the home requires, or whether or not you're able to keep up with property taxes should they increase in your area.
Negotiating a buyout
Although some buyouts involve paying the other parent a lump sum equal to their equity in the house, parents can make alternative arrangements that affect the total amount of the buyout. The parent wishing to purchase the house, for example, may give up their claim to other shared assets equal to their co-parent's equity in the home in their divorce settlement agreement. In certain situations, negotiating for a lower buyout amount in exchange for a reduction in alimony may also be an option.
Some spouses may propose to buy out their co-parent's interest in their home gradually over time, but this arrangement can be dicey for the selling parent. As long as their name remains on the mortgage, no matter if the buying co-parent has agreed to take over all house payments alone, they are still financially liable for any missed payments.
There are many reasons parents may not wish to part with their familial home during a divorce. Maintaining the same residence can be a salve to children during the upheaval of their parents' separation. It can also prevent the further upheaval that comes with moving, such as changing school districts or moving away from neighborhood friends. But no matter the reason for wanting to keep the family home, it's paramount that it first be a financially stable decision to pursue. Parents should consult their family law professional and financial advisers before deciding to buy out their co-parent's equity in the home.