Falling in love makes people do foolish things. Falling out of love, however, can be a calculated business transaction—at least in real estate. What happens to a homeowning couple’s largest asset when they file for divorce?
“It will always depend on the couple’s financial situation,” says Tanja Milanovic, local real estate agent with Roy Wheeler Realty Company.
In the current housing market, under the shadow of recession, divorcing couples have resorted to creative strategies in order to survive both financially and emotionally. One such tactic is to wait it out until the economy improves. According to the National Marriage Project, many couples who may have thought of divorcing before the housing bubble burst ultimately decided to stick together. In fact, the recession seems to have helped decrease the overall divorce rate.
But with matters of the heart, nothing is ever certain. And many couples still find themselves entering divorce proceedings and starting down the difficult road of splitting their assets.
If the couple wants to keep their home, one option is for one spouse to move out, while the other stays put. More often than not, says Milanovic, the woman remains in the house with the children, “so there is not going to be any change to the kids involved, so that they don’t have to go to a new school.”
With one spouse in the home, “the other would pay [the house] off, and the mortgage would be transferred if the bank decided that one partner was able to financially carry the loan,” she says.
Alternatively, the partner who chose to remain in the home has the option to refinance, thus using the acquired equity to buy out the other spouse. The lower interest rates for refinancing can work in favor of the spouse who takes over the mortgage. For example, if the couples owes $100,000 on the mortgage and both spouses have agreed to split distribution of equity—$50,000 each—one spouse would have to borrow $150,000 to pay off the existing loan and buy out the other.
However, says Milanovic, that is not always possible.
“The cleaner and less complicated way is for a couple to sell the house even before the divorce,” she says. Milanovic knows couples who have sold their home in the middle of divorce proceedings, “which is more stressful.”
For those couples who can neither afford to keep the house, nor sell it, a short sale (where the amount the couple owes the bank exceeds what the house is worth) is a plausible solution.
“It’s a lengthy process, because the short sale first needs to be approved by the bank,” says Milanovic.
To speed up the process, some homeowners choose to advertise the short sale even before it has been approved by the bank. “At times, the advertised price is not always the one the banks approves,” thus endangering the couple’s financial lifeline, she says.
Some divorcing couples end up renting out their former love nests.
“For a job transfer or for a divorce or any family situation, it’s becoming a more popular option because of the lack of funds and lack of ability to qualify to get a mortgage,” says Denise Ramey, a local agent.
Some homeowners even rent one bedroom at a time. “In one case I know, [the couple] decided not to do anything with the house, but one partner who stayed in the house has found a roommate, who shares the financial responsibility,” says Milanovic.
It is also not unusual to hear of one spouse moving into the basement of the couple’s home. For cash-strapped divorcees, even that awkward situation might be preferable to moving in with relatives. Breaking up is tough business—and it’s rough on the finances, too.
