Buying Out Home Equity When Getting Divorced

Written by J. Hirby and Fact Checked by The Law Dictionary Staff  

Although many weddings vows include some variation of the phrase “til death do us part,” most marriages in the 21st century end up in divorce. After the delicate issue of child custody and support, the thorniest matter in dissolution of marriage proceedings is the equitable distribution of marital assets, particularly when it involves real estate.

A residential property purchased after the wedding is automatically considered marital property in virtually all jurisdictions. Even if for some reason the husband or wife decides to quit claim out of the deed to a marital abode, the court may still consider the home as marital property irrespective of how tittle is held or how the mortgage is structured.

Dividing Property Equity

Modern family court divisions encourage couples who plan to get divorce to work out their property distribution via mediation instead of litigation. Should the spouses bring their disagreements to court and end up in a deadlock, the judge may decide to apply a statutory distribution scheme, which in some jurisdictions means a strict 50/50 split. Since the judge cannot practically apply a chainsaw through the middle of a house to cut it in halves, the equity or value of the property must be divided by selling it.

Real estate does not always have to be sold for the purpose of equitable distribution in a divorce proceeding. Through the process of buying out equity, either spouse can keep a home after the divorce is finalized. This process would require a mediated agreement to be approved by the court, and it can be accomplished in various ways.

Paying cash is a typical method for buying out equity. If a property is appraised at $100,000 and the loan-to-value (LTV) ratio is 70 percent, the total equity is $30,000. This means that a divorcing spouse who intends to keep the home could pay $15,000 to the other. It is not always necessary to resort to cash payments; in fact, most equity buyouts are negotiated with either other assets such as furniture, vehicles and investments. The court may even approve a mediated distribution plan whereby the equity is bought out by means of monthly payments.

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