Dividing Home Equity in a Divorce

One of the major questions in a divorce is: Who will keep the marital homestead and how will the other spouse be compensated? Due to the housing market crash and the recession, answering this question has become increasingly difficult.

What is Equity?

Equity is the difference between the fair market value of the home and the amount owed on the mortgage. Many states, including Arizona, are community property states. This means that in the event of a divorce, homestead equity is divided equitably.

When dividing home equity, it is important to consider the following:

Did one spouse put more money into the property than the other? Many states consider a spouse's contributions and the length of the marriage when determining an equitable split of homestead equity.

Is one spouse going to continue living in the homestead? This is especially relevant if there are children in the picture. It may be in the best interests of the children for the primary custodian to continue to live in the marital home.

What are the financial circumstances of both spouses? It is important to analyze whether or not one spouse can afford to live in the house without financial contributions from the other. If neither party can afford to maintain the home, selling it may be the only option.

The current housing market and economic climate has made selling the homestead and splitting the equity extremely difficult. Before the recession, divorcing couples could sell the homestead, split the equity and feel they received a fair deal. Today, unfortunately, many houses don't have equity to split.

Dividing Homes with No Equity

When a house is underwater - the couple owes more on the mortgage than what the home is worth - the only way to sell it is to pay the difference or sell the house through a short sale. A short sale will have a negative impact on both parties' credit scores. In order to save credit, one party has to keep the house and pay the mortgage. Unfortunately, mortgage lenders do not care if you are divorced and will continue to hold parties remain liable for the mortgage unless the house is sold or refinanced. Without equity, however, refinancing is difficult to impossible.

This means that often times, a spouse has to trust their ex-spouse to make the payments. If this is the case, the divorce decree should provide protections to the other spouse. An experienced divorce attorney can help you through these difficult property division issues and make sure your divorce decree protects your rights.

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