Pay attention to details when "buying out" a spouse

When Samantha Parker and her husband Tom separated, Samantha decided she wanted to stay in their home to minimize the number of changes for their three young children. While not exactly pleasant, Samantha said that buying out a spouse does not need to be difficult if handled as a business transaction, and like any other part of the separation agreement, the spouses' attorneys should be involved.

First, the spouses need to agree on a price. This can be tricky since the seller wants it higher and the buyer wants it lower. With the help of their attorneys, Samantha and Tom solved this issue by obtaining separate appraisals and agreeing on a price in the middle. Next, they negotiated on other aspects of the sale as part of the overall separation agreement.

For example, in this type of buyout there are no fees paid to real estate agents, but in the future the spouse who keeps the house will have to use part of his or her equity to pay those fees when it comes time to sell the house. It may be possible to negotiate that the selling spouse pay to the buying spouse half the future real estate commission from his or her equity for the future sale.

Also, it is wise to consider that the house is just one piece of the entire division-of-assets picture, she said. For example, one person may feel strongly about keeping a jointly acquired asset, such as a grand piano. If so, that person may be willing to negotiate on other items related to the buyout, such as not asking for needed repairs or similar items that usually may be part of the sale of a home. Even items such as cars and college costs can be part of the buyout process.

"You should have every asset on paper, and look at it as a whole so that both parties walk away feeling comfortable," Samantha said. "You can save a lot of attorney fees by not battling." All negotiations should be complete before the buying spouse attempts to get a new loan on the home, Samantha said. A signed separation agreement may be required.

Buying out a spouse is essentially a cash-out refinancing process. The equity is taken out of the home and half (or the amount agreed upon) is paid to the selling spouse. The buying spouse then puts the remaining equity (or the portion he or she wishes to use) as the down payment on the new loan. The resulting monthly payment can be much higher depending on the value of the home, the interest rate at that time and the smaller amount of equity being put back into the house.

Samantha pointed out that it's important for the buying spouse to consider all loan options. She consulted several lenders and decided to obtain a five-year adjustable-rate mortgage (ARM) with the thought that she may sell in that time period. She was comfortable with that level of risk. "Five years gave me an option to decide what I'm going to do."

She also considered a loan with "negative amortization," meaning her payment would not cover the minimum amount needed to pay down the loan balance. She would have a lower payment but the loan balance would increase and her equity could decrease if the value of her home were to decline. She considered this type of loan only because she lives in an area where housing values have tended to increase over time, but she decided that the risk was a little higher than she wanted to take.

Even with an ARM, Samantha's monthly mortgage payment is higher because the purchase price showed that the value of her home had increased and because interest rates had risen since she and Tom bought the house. An advantage to keeping the home-other than not having to move the children-is that it provides a tax deduction, which increases because she is paying more interest. She'll be able to take full advantage of the tax deduction for interest paid on a home mortgage loan, and she will not have to pay the alternative minimum income tax.

In regard to credit, it is important for the lender to be assured that the buying spouse will not be responsible for any of the selling spouse's debt. In the separation agreement, the amount of debt that each party is responsible for should be clearly spelled out. "You won't know how much buying power you have until this is finalized," Samantha said.

After all documents were signed, Samantha was able to have the loan closing at her home so she would not need to leave her children with someone while she attended the closing. This arrangement had been made with the lender and closing attorney. She and Tom split the closing costs, and Tom signed a "quitclaim deed" relinquishing future interest in the property in the event that the property value increases.

Samantha, who works full time, said the buying spouse's income and credit must be sufficient to allow the buyer to qualify for a loan that does not put him or her in a difficult financial position. "If it stretches you too far, don't keep the house. Sell and take the equity and rent for a while. Don't take on more than you can handle to keep the house. Kids are so resilient. Don't feel you have to keep the house."