One of the most common questions we are asked in divorce cases is: What happens with the house? There are several important factors that go into answering this question. First, is the house community property or separate property? The house is community property if it was bought during the marriage (unless purchased with someone’s separate property funds.) If the house was bought prior to the marriage, it is the separate property of the person who bought it. This is true regardless of whether or not the couple was together at the time they bought the house.
If the house is community property, the general rule is that if one party wants to keep the house, he or she must (a) be able to refinance the mortgage into his or her own name; and (b) be able to buy out the other person’s share of the equity. The equity buy-out can occur in a number of ways, such as shifting other assets to the other spouse to account for the equity, a cash-out refinance, or the spouse taking the house takes on additional debt to balance out the equity. A stay-at-home parent is almost never able to refinance and keep the house because he or she does not have the income to qualify for the mortgage independently.
If the house is separate property, the house goes to the person who owns it. The non-owning party may be entitled to reimbursement for some things related to the house. The non-owning spouse is entitled to be reimbursed for one-half of the principle reduction of the mortgage during the marriage and for any increase in value due to capital improvements made to the house during the marriage with community funds. The non-owning spouse does NOT get the benefit of any increase in value of the house that happened during the marriage.
Below are a few examples of common scenarios we see related to the house. Each of these scenarios involves the same couple who is together the same amount of time, but the end result can be very different.
Ex. 1: John and Mary got engaged after having dated for two years. They looked for a house together, picked it out together, and participated equally in choosing the house. The purchase price of the house was $500,000. John was approved for the mortgage on his own, so the transaction took place entirely in John’s name. John closed on the house on March 31, 2005, with John putting 20% down and taking out a mortgage for $400,000. John and Mary got married on April 1, 2005 and immediately moved into the house. No payments were made on the house until after the parties were married, and the couple never made any capital improvements. John and Mary decide to divorce in 2019. The remaining balance due on the mortgage is now $300,000, and the house is now worth $600,000. In the divorce, the house will be confirmed as John’s separate property. Mary is entitled to reimbursement of $50,000 (for her half of the principal reduction of the mortgage.)
Ex. 2: Using the same facts as example number 1, except that John signed the contract to purchase the house on March 15, 2005 but did not close on the house until April 15, 2005. Even though he closed after the date of the marriage, the house is still John’s separate property because he signed the contract prior to the date of divorce. The result is exactly the same as in example 1 above.
Ex. 3: John and Mary got married on April 1, 2005 and entered into a contract to buy a $500,000 house on April 2, 2005. The parties put 20% down (which came from John’s separate property from before the marraige) and took out a mortgage in both parties’ names for $400,000. The parties divorce in 2019, with the house being worth $600,000 and the balance due on the mortgage being $300,000. The house is community property, but John is entitled to get his $100,000 separate property down payment back The remaining $200,000 in equity is on the table for property division. If John keeps the house and buys Mary out of her half of the equity, Mary will get $100,000 from the house.
Ex. 4: John and Mary have been dating for a year. They pick out a house together, and John purchases the house for $500,000 on March 31, 2005. Again, he put 20% down and took out a mortgage for the remaining $400,000. The parties moved into the house together on April 1, 2005. Although the parties lived together the entire time, they did not get married until April 1, 2018. On the date of the marriage, the balance due on the mortgage was $310,000. The parties divorce in 2019. The balance due on the mortgage is now $300,000. The house will be confirmed as John’s separate property, and Mary is entitled to reimbursement of only $5,000 (for half of the principal reduction during the marriage.)
As you can see, when someone purchases a house is vitally important to how that house is handled in a divorce. In all of the above scenarios, John and Mary put the same amount of total funds into the house, but the amount of community equity varied dramatically based on the timing of the home purchase and the timing of when the parties got married. Because of the complex issues involved with community and separate property, it is a good idea to consult a knowledgeable family law attorney if you need to determine exactly what would happen with your house.