In today’s post we will explore the very common issue of dealing with a house in divorce. In most divorce cases this is one of the big controversies, that is exactly what to do about the marital residence. If the parties rent their residence this is a non-issue, but in most divorce cases there will be owned real estate that must be dealt with.
Two Most Common Ways to Address a House in Divorce
While every case is different and there are many unique and unusual sets of circumstances, for most cases there are only two realistic divorce outcomes when it comes to the house. Either the house gets sold and the proceeds from the sale split (usually on some percentage basis) or either the husband or the wife is awarded the house along with the debt attached to the house.
What About the Equity?
When one spouse is awarded a house that has significant equity the other spouse will want an offset from some other asset. As a simple example, let’s say a couple has a house with $100,000 in equity and their only other asset is a 401k account in husband’s name worth $100,000. If wife was awarded the house and husband was awarded the entire 401k account, it would be a 50/50 division. If instead neither party wanted the house and they put it on the market they could then split the net proceeds from the sale of the house 50/50 and also split the 401k 50/50. That would also be a 50/50 division.
What Real Estate Documents are Used to Transfer the House?
If instead of selling one spouse is awarded the house then in a typical case this requires just two real estate transfer documents. These should normally be done at the time of divorce along with the Divorce Decree and other transfer documents. The first document is a “Special Warranty Deed.” This document is signed by the spouse who is not getting the house and in effect it says that the other spouse is now the 100% owner of the house (subject to the debt secured by the house).
The second document is a “Deed of Trust to Secure Assumption.” This document is signed by the spouse who is getting the house and in effect it is that party’s promise to pay the existing mortgage in a timely fashion. If the party who receives the house falls behind on the mortgage payments or in any way defaults on the mortgage, the Deed of Trust to Secure Assumption gives the other party certain recourse against them. The details of that potential recourse are spelled out in the language of the Deed of Trust to Secure Assumption.
Divorce Transfer Does Not Remove Name from Mortgage
One important issue that is often misunderstood concerns the existing mortgage. In the scenario described above, the mortgage that is held in both parties names stays in both parties’ names, even after divorce. Parties sometimes assume that because they have agreed for one party to solely assume responsibility for the mortgage that this agreement is binding on the lender and all they need to do is call the mortgage company to get the name changed on the account. Not so. The lender will always refuse to do so.
The only way the other party will be relieved of that liability is if the mortage is paid off, either by refinancing it or by selling the property. In other words, the debt will remain on the credit report of the non-owning spouse until the debt is paid off. If the owning spouse goes into foreclosure then that will impact the credit of not only the owning spouse but also the non-owning spouse.
The bottom line is that if your spouse is being awarded the house in your divorce case, it is very much preferable if at all possible to have them refinance the property in their own name. Usually the refinancing can happen prior to divorce (or at least pre-approval obtained prior to divorce) or within a set deadline that is included as a term of the Decree.
I hope this helps clarify the issues surrounding how to deal with a house in a divorce case. For information on a related important topic, see this post on hiding assets in divorce. If you have questions or comments please feel free to share them below.