Divorce and Mortgage: The Guidelines on Buying Out Home Equity

While many married couples stay together forever, some, unfortunately, end up in divorce. Following the resolution of child custody and child support, the divorcing couple should also deal with the contentious matter of marital asset division, particularly real estate. Any residential property that the couple bought following their wedding would automatically be considered a marital asset in virtually all states.

That holds true even if one of the spouses opt to relinquish his or her claim to the marital property, the court might still consider the property a marital asset regardless of the structure of the mortgage and the title of the property.

Distribution of Property Equity

The majority of courts these days encourage divorcing couples to try and resolve property division through mediation first rather than going straight to litigation. In the event that they chose to litigate and end up in a stalemate, the judge might opt to use the statutory division scheme, which basically means a 50/50 distribution, in which the property value or equity should be divided after selling it.

However, real estate doesn’t have to be sold just to satisfy the equitable distribution of property. Through an equity buyout, either spouse could keep the property following the final ruling of the divorce. But the entire process would require a court-approved mediated agreement. A cash payout is the most common method for buying out property equity.

For instance, if the property’s value is $100,000 and your LTV or loan to value ratio is 70%; your total equity would be $30,000, explains a home loan expert at Altius Mortgage Group. This way, the spouse who plans to keep the property would just have to pay the other spouse half of the equity, which is $15,000. Or the spouses could negotiate other marital assets such as investments, vehicles, even furniture instead of cash payouts.

If you were going through a divorce, you would have to divide all your assets and debts obtained in the course of your marriage. In case one or both spouses don’t want to sell a property, this decision would affect both parties unless the spouse who’s planning on keeping the property could get the other spouse off of the property’s mortgage or have enough money to buy out the other spouse.