For divorcing couples whose family home is community property, it’s often their most valuable asset, and who gets to keep it can be a contentious issue. It’s usual for the spouse who has primary custody to want the children to remain in their home, attend the same school, and stay close to friends. However, the divorced spouse can’t always afford to keep the family home because it’s too expensive, so they have to sell, divide the proceeds, and buy smaller homes in the same area. If the couple doesn’t sell the home, how do they get the other spouse’s name off the joint mortgage? The answer is for one spouse to keep the house, pay their partner half the equity in the home (value of the home minus the mortgage balance) in cash or other assets, and refinance the mortgage.
Who Keeps the House?
Who keeps the house is usually determined by the goals and budgets of the two spouses. The answer depends on whether the person who wants to stay in the home can afford the mortgage and taxes, support herself and the children, and have enough money left over from income and community assets to compensate the spouse giving up the house. If that’s not possible, the only option is to sell the home, split the proceeds, and buy a new smaller home in the same area.
Setting a Price
If one spouse decides to keep the house and can afford it, the next step is to appraise the home. There are a number of ways to set the price. The least expensive way if for the parties to agree on a value. If they can’t agree, other options are to use the tax appraisal on the home, ask a real estate agent you trust to estimate the value of your home, or calculate it’s market value using an online service such as Zillow (better yet, average all three values to get a more accurate estimate). The most expensive and accurate way to estimate the value of your home is to engage a licensed real estate appraiser to give you a professional estimate of the home’s value. The appraiser will find three or four comparable homes in the same or a similar neighborhood that sold within the last six months, adjust each comparable home for differences in square footage, amenities, or upgrades, average the estimates from these comparable sales, and generate an accurate market value price for your house. Generally, a professional appraisal in Texas costs between $300 and $600, depending on the size and price of the home.
Compensating the Leaving Spouse
Once the couple determines the fair market value of their family home, the spouse wanting to keep the house must pay the other party one half the equity in the home. This can be accomplished by paying cash or trading other assets of comparable value to the spouse moving out of the home. In addition to compensating the spouse giving up the home, the person keeping the home must budget for mortgage payments, upkeep, real property taxes and living expenses. If the family home is a large and expensive one, these costs may be prohibitive for either divorced spouse. If one spouse can afford the home, the next step is to refinance and get the other spouse’s name off the joint mortgage.
The refinancing spouse must be able to qualify for a mortgage on her own because the bank will look only to her income and assets for mortgage payments. The point of refinancing is to remove the other spouse’s name from the mortgage and Warranty Deed to protect both parties’ credit. The property division agreement, called an Agreement Incident to Divorce in Texas, should contain the terms of the buy-out and refinancing of the home. These terms should include the price, method of paying one-half the equity to the leaving spouse, issuing a new Warranty Deed in the name of the spouse keeping the home, and specifying a date for completion of the deal. Few mortgage companies will issue a “release of liability” to remove the divorcing spouse from the note without refinancing, because banks want to keep both parties liable for the old note. All lenders require a credit check for the new single spouse to qualify for refinancing. A typical credit score needed to qualify for refinancing is around 630, along with a debt-to-income ratio of 50% or lower.