Divorce and Real Estate in Washington State
Divorce is so much more than an emotional decision. It is a financial and legal decision that can impact everything from your finances to your home itself. One of the biggest investments a couple may make during a marriage is the purchase of real estate. It is understandable that one of the biggest questions you might have if you are thinking about divorce or going through a divorce is “what will happen to real estate during a divorce in Washington state?”
Will you lose your home to your divorce? Will you need to sell your home and split the proceeds? And if you get to keep the home, can you afford it, and is refinancing an option? Division of real estate in Washington state is a complicated topic. The first step in understanding what happens to real estate during a divorce is to ask whether the home was purchased before or after you were married.
When the Real Estate Was Purchased Matters: Community and Separate Property
When deciding who gets what in a divorce, the courts will first need to determine whether the real estate or home in question is community or separate property. What does this mean? Community property is property purchased or acquired during the marriage.
The courts view this property as shared and subject to division during a divorce. Separate property is property you owned before the marriage: like things you inherited (your grandmother’s diamond ring), gifts you received, a car you bought when you were single, or that beachside condo in Florida you purchased before you married your future spouse.
Basically, if you purchased the property before you were married, and the income that you earned from the property remained in your own separate account, then you’ll likely keep the property during your divorce. But these are just general guidelines and sometimes determining shared and separate property can be one of the most challenging aspects of a divorce.
Things can get complicated if your partner moved into your property after you were married and contributed to substantial improvements to the home, if rental income from the property went into a shared bank account, or if you were in a serious relationship before the marriage and purchased the home during that time.
If any of these things are true, the courts could possibly see property purchased before your marriage as community property and subject to division during your divorce.
If you purchased a home or real estate after you were married, then the situation is simpler (unless you have a prenuptial agreement). Property or real estate purchased during your marriage is generally subject to property division during divorce.
As you can see, determining whether property is shared or separate can get complicated. The divorce lawyers at Truce Law in Washington State can review your situation and help you understand what property might be considered shared and separate during your divorce.
Your Washington State divorce lawyer will look at when the home was purchased, what the real estate was used for, where the income from the property went, and what happened to the property during your marriage. The answers to these questions will determine whether the property is subject to division during your divorce.
Understanding Division of Property, Assets, and Real Estate in Divorce
Any property that is considered shared or community property is subject to division during a divorce. This includes real estate that was purchased after you were married (but can also include real estate purchased before you were married that became community property).
Real estate, property, and assets may not always be divided 50/50 during a divorce. Under Washington law RCW 26.09.080 property is divided in a divorce in a manner that is “just and equitable after considering all relevant factors.” These factors include a close look at:
- Your community property
- Your separate property
- How long you were married
- Each partner’s economic circumstances.
There are a few situations where shared property may not necessarily be divided 50/50 in a divorce. Let’s consider the fact that the courts will consider, “the economic circumstances of each spouse or domestic partner at the time the division of property is to become effective, including the desirability of awarding the family home or the right to live therein for reasonable periods to a spouse or domestic partner with whom the children reside the majority of the time.”
In other words, if one partner will have primary custody of the children, the courts may favor awarding the family home to the parent with primary custody to preserve stability and the best interests of the children (this is, of course, assuming that the primary custodial parent can afford to pay the mortgage, maintain the costs of the home, potentially refinance the mortgage to remove their spouse’s name from the obligation).
Another factor that could result in a less than 50/50 split is where the marriage was very short in duration. In this case, the courts may choose to restore each party to his or her financial state before the marriage. If a husband buys a big house right after he gets married and the wife wants to divorce him within the year, he may be able to argue in court that he should keep the house, especially if the relationship was brief and he used his separate property (i.e. funds he had before the marriage) to make the purchase.
In many cases, it might be possible to divide property equally as well as “just” and equitably. An example of this might be a case where a couple owns a home worth $500,000 with a $250,000 mortgage, and a shared 401(k) with a balance of $250,000. This might sound like a situation with a simple solution.
One partner keeps the 401(k) and the other refinances and takes over the mortgage. Easy, yes? Well, not so fast. A 401(k)’s value may represent pre-tax value, and after-tax value may be lower. And refinancing a mortgage in today’s climate of higher interest rates may result in higher monthly payments and greater costs to the spouse who keeps the home.
So, let’s say the couple decides to try selling the home, but this can raise challenges too, especially in a buyers’ real estate market. Selling the home may not be the most financially sound option.
This is a situation where the collaborative divorce process can be incredibly helpful. Couples can choose to try to make the division of their property as fair and possible for both parties and can work together to find solutions to these tough financial decisions so that they don’t end up making unsound financial decisions just to settle the divorce more quickly.
Truce Law provides collaborative divorce in Washington state that helps couples navigate the division of real estate, especially in a time where interest rates are higher and the real estate market favors buyers rather than sellers.
Let’s look at some options for handling real estate during a divorce.
If you will keep the house and there’s a mortgage in both partners’ names, you’ll need to refinance the mortgage (and also make sure in the process that your ex gets removed from the deed). But with interest rates going up, the thought of refinancing right now might make you concerned that you’ll face higher interest rates.
The good news is that it is not a given that you’ll face higher interest rates on your refinanced mortgage, even with interest rates going up. Here are some things to keep in mind.
Refinancing in divorce raises unique challenges. When you got the mortgage with your former spouse, your bank likely used both your incomes, both your credit scores, and both your assets to approve the mortgage and determine your interest rate.
When refinancing, the bank will now only look at your income, your assets, and your individual credit score to determine whether you can afford the mortgage and to determine your interest rate. If you’ll have equity in the home thanks to increased home values or payments you made over the years, this could also favorably affect the kind of mortgage and interest rates you might receive.
The big question the bank will ask is: can you afford this mortgage on your own? If you will receive alimony or child support after your divorce, you could possibly include this as income to qualify for the mortgage. If you have equity in the home, you may be able to use a cash-out refinance to pay your former partner’s share in the home.
But when it comes to determining your interest rate, this will largely depend on your credit score and whether your equity in the home increased. For example, you may have a higher credit score than your former partner, or your credit score may have increased during your marriage, or perhaps you have more equity in the home now, and the loan is seen as less risky.
Of course, it is also possible that your credit score decreased, but again, these factors are independent of current interest rates. But, if you have a history of paying your mortgage on time and a strong relationship with the bank, this could also be seen favorably.
Talking to your mortgage specialist or banker might be a good first step in understanding how refinancing might impact your specific interest rates. Another thing to keep in mind is that you can also shop around for other mortgage options and other lenders.
Yet, current interest rates notwithstanding, a single person applying for a mortgage may still face higher interest rates than a couple with two incomes. And if you and your former spouse got your mortgage years ago, you may find that interest rates right now are still lower than when you purchased your home. So, you may be in a better situation than you think.
Still, the whole thing is complicated. Because of these complexities, it can help to work with a collaborative divorce lawyer at Truce Law. Our collaborative divorce lawyers in Washington state can help you as you consult with financial experts, lenders, and planners to help you understand the financial implications of refinancing your home in the current financial climate.
#How Refinancing Works
When you refinance your home, you are essentially applying for a new mortgage. Refinancing during a divorce can allow you to take out a mortgage in your own name (removing your former partner from the mortgage) and may allow you to draw on your home equity to receive cash that can help you pay your former partner’s share of the property (this is known as a cash-out refinance).
The process of refinancing your home loan is like the mortgage process. You’ll need to provide W-2s or proof of income, 60 days’ worth of bank statements, proof of any other income, and assets, and your lender will need to pull your credit report. When refinancing, you don’t have to work with your original mortgage lender, and it might pay to shop around.
If your credit has improved, if your job has become more stable, or if your life circumstances have changed, you may find that you have more loan options than you had before. You may even qualify as a first-time homebuyer if you only owned property with your spouse and are now displaced as a result of having to sell or refinance your home.
If your spouse owned the home, and you never owned a home, or only were put on the title after you were married, you may also qualify as a first-time home buyer. As a first-time homebuyer, you may qualify for special benefits from your lender or from government-backed loans that can offer additional benefits.
Once you have submitted your refinance application and documentation, the application will go to underwriting. During this process, your home will need to be appraised. This is an important aspect of the refinancing process.
If you are asking for a cash-out refinance, the value of your home will determine how much cash you can receive through the refinance. The appraisal will also determine how much equity you have in the home and may determine the kind of loan options available to you, and whether you’ll need mortgage insurance.
If the value of your home has increased or if equity has increased, you may no longer need mortgage insurance and your monthly payments may be lower, even if interest rates right now might be a little higher.
One of the benefits of refinancing, is that even if it turns out that the loan isn’t approved, you’ll have an appraisal, which can help you should you need to sell your home.
2. Selling the Home
What if you can’t afford the mortgage on your own or the bank won’t approve the refinance? What if you don’t want to live alone in that big house you shared with your wife or husband? Sometimes selling the home and splitting the profits is the easiest and best option.
But, it can be helpful to look closely at the real estate market. If the market is down, couples might be able to use the collaborative divorce process in Washington state to reach a divorce agreement that allows the couple to sell the property when real estate conditions are more favorable.
For example, you could work out a divorce agreement where you can rent the home until real estate conditions improve, and then set a “trigger” valuation at which you’ll put the home on the market.
3. Buying Your Partner’s Share of the Home
Another option you might have is to buy your partner’s equity. Let’s say your home is worth $500,000 and $300,000 is owed on the mortgage. This means that each person owns $150,000 in equity in the home.
The person keeping the house could either come up with the $150,000 on their own, or refinance, cash out the $150,000 value and use this to pay their partner’s share. Another option would be to divide other property so that the other spouse receives the $150,000 in equity in vehicles, retirement accounts, bank accounts, art, or other valuables.
4. Renting the Property
Finally, another option is for you to both keep the property and split rental proceeds or agree to a “nesting” divorce arrangement where the children continue to live in the family home, and you and your former partner reside in the home during custody times.
Nesting or renting effectively puts you and your former partner in business together as being co-landlords and co-owners. Some couples with high assets may simply choose to put the family home in trust for the children and choose a “nesting” arrangement.
Nesting and co-ownership arrangements can work with a couple that has an amicable divorce, or where both parties can easily afford their own separate homes or spaces.
Being co-landlords could also work as a temporary solution while one partner gets on their financial feet to afford a refinance, or while both parties wait for the real estate market to heat up.
Then again, if you have a good relationship with your former partner or speak to your financial advisor and believe renting out the property or “nesting,” might work, this could be an option for you.
The Final Word
There are many options when it comes to managing real estate in a divorce in Washington state. Splitting assets in a divorce can get complicated, and the courts may look at various factors when making these decisions. It is possible that you take your case to court and find that the judge gives one partner more than the other. Because of this possibility, many divorcing couples ultimately choose to use the collaborative divorce process to help them work out a plan for dividing shared real estate.