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Show Me the Money: Selling the House v. Refinance in a Divorce

Updated: Nov 4, 2022

Many divorcing couples think selling the marital home and splitting the proceeds is 1) the only option or 2) the option that yields the most money. I am here to tell you that’s not the case. There are numerous reasons for this … a few of them are discussed here.

What constitutes “equity?”

I have had many clients who think equity in a property is a dollar amount you get when you deduct the existing mortgage balance from the home’s value. In general terms, that is the concept. But in reality, there are additional considerations, especially in the case of a divorce refinance.

Who determines how much equity a couple has a in a property?

Only in very rare scenarios can 100% of a home’s value be financed. In most cases, the maximum Loan-to-Value (LTV) is 95% … and for a conventional loan with no private mortgage insurance, it’s 80%.

When I am calculating divisible home equity, I use a formula to give a divorce attorney a rough estimate of how much the soon-to-be ex stands to receive based on max LTV. This formula includes closing costs to refinance, pre-paid items (e.g., taxes), and an estimate of the home’s value. If there are liens on the property in addition to the existing mortgage (tax liens, unpaid HOA dues, etc.), I advise the attorney so the divorcing parties can determine how to satisfy that debt in advance of a refinance.

Who determines the home’s value?

Very seldom do I encounter a divorcing couple who agrees on what the marital home is worth. It’s not unusual for the person keeping the home to think “it’s not worth that much.” And the departing spouse might insist it’s worth much more.

If the couple can agree to a reasonable value of the home based on comparable sales, an appraisal may not be required. In that case, I would plug that agreed-upon value into my formula to estimate equity. But if someone involved in the transaction insists on an appraisal, the appraised value must be used. Keep in mind a lender can only use an appraisal the loan officer ordered. It is the law. An appraisal ordered by a homeowner or a lawyer can’t be guaranteed an “arm’s length” or impartial assessment.

Appraisals may come in higher or lower than expected … so it’s best to ask the Divorce Lending Specialist to order one early in the negotiations

Why doesn’t selling the home guarantee more money?

Typically, the divorcing couple who sells pays up to 6% in Realtor commissions … and if the buyer requests repairs, the amount for repairs should be deducted from the sale price, along with commissions and any seller concessions.

One of the stickiest areas of asset division in divorce is home equity division. Don’t leave it up to others to decide. Consult a Certified Divorce Lending Specialist and negotiate the best deal for yourself.

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