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How to keep your house when you divorce

Posted by Elizabeth Steen | Dec 09, 2020 | 0 Comments

During your marriage, you probably bought a home, paid into retirement accounts, maybe set up some college savings for your children, and tried to pay down your student loans. Washington is a community property state. Each partner owns half of all the property gained during the marriage. Washington also allows separate property of one spouse to be distributed to the other spouse in some circumstances. 

When you transition to two households, you need to split what you have in a way that allows both of you to feel protected, safe, and set up for the future. Setting up the details and planning ahead during your divorce helps both partners avoid unpleasant surprises later. 

If one spouse wants to keep your house during a divorce, there are two ways to do this. One partner can refinance the house and take out a lump sum to pay the other partner their half of the equity in the home. Or both partners can sign a Settlement Agreement/CR2A to allow one partner to live in the house for a little while.

Refinancing your home is all about the details

First, the refinance: If the partners choose to refinance the home as part of the divorce, the refinance has to be timed to manage taxes, interest rate concerns, the bank's risk profile, and other factors. If you already have a job that will pay the mortgage, then usually you want to refinance your house in your own name before you file your divorce paperwork. This is because some banks require income records at the post-divorce level for six months or a year. Before Settlement Agreement/CR2As became best practices, a number of people were unpleasantly surprised during their divorce. They filed the paperwork and waited for the mandatory 90-day waiting period. After waiting three months, then they would find out that their divorce paperwork awarded the house to one spouse, but that spouse still couldn't qualify for a mortgage on the house because the bank wanted to see a year's worth of income post-divorce. When the spouse who wanted to keep the home finally qualified, the banks often gave them less favorable terms because of the recent divorce. Meanwhile the first spouse, who had already left the house, couldn't qualify for a mortgage either, because their name was still on the mortgage for the first house that couldn't be refinanced for another year. This situation caused a lot of conflict and unnecessary lawyers fees.

A Settlement Agreement/CR2A is a way to get around the potential conflict when you transfer your house to one spouse during a divorce, in many cases. The bank can take both spouse's income from the Settlement Agreement/CR2A, so you don't have to wait 90 days for the court order awarding you the house. And the Settlement Agreement/CR2A is a final order in your divorce. This means that, as a final order, the Settlement Agreement/CR2A can be enforced by the court. So the bank has some certainty about the contract - it's a final order that the bank can rely on to award both of you a loan, knowing that your income won't fluctuate. To the bank officials making a loan, someone in the middle of a litigated divorce is a poor credit risk. The bank official doesn't know if divorce litigation will last six months, a year, or longer (some divorces are litigated in court for three years or more). The bank official can see how much money you have when you start a divorce litigation. But no one wants to extend credit to someone who could spend $40,000 in legal fees in the next six months to a year as their litigation drags on. The Settlement Agreement/CR2A gets around this problem for the bank, and helps both partners move into new homes more quickly. 

Another consideration is that if you refinance your home in your own name as part of a divorce, then your ex-spouse will need to transfer their interest in the home with a quit claim deed. And you will both need to file a REETA form under the law that allows a tax-free transfer between spouses. (Learn more about a REETA here). In Washington, the rules allow a tax-free transfer of a home or other real property to a spouse "in fulfillment of a settlement agreement incident to a decree of dissolution, declaration of invalidity, or legal separation." WAC 458-61A-203

A Settlement Agreement/CR2A can give you more options

Second, a Settlement Agreement/CR2A helps one partner keep the house when that partner can't afford to refinance immediately. If one partner is keeping the house under a Settlement Agreement/CR2A, then the Settlement Agreement/CR2A will need to specify some important details. The spouses will decide who makes the mortgage payments, whether they share liability for accidents, who pays the taxes, an equity split based on mortgage payments or other contributions from each partner, and other considerations. It's usually a good idea to consult a CPA or tax preparer to consider how to split the tax credits and other tax benefits of owning the property, too. Most important, the Settlement Agreement will establish a time frame for the parties to move on from the house with a sale or a refinance in one partner's name.

Usually this separation and sale or refinance is timed for a particular event in your life after the divorce. A lot of people like to say that they will keep the house for one partner until the children reach a certain age, or a partner qualifies for refinancing on their own, or both parties agree that the timing is right to sell and divide the equity. The Settlement Agreement/CR2A will set up processes to the partners can notify each other when they want to sell, and procedures to work out a conflict if one partner wants to sell and the other doesn't. The parties can plan ahead on how to handle it if one partner loses their job and needs the money from the equity right away, or can no longer qualify for a refinance. This avoids the extra court fees that a transition to a refinance or sale can create, because both partners can rely on the Settlement Agreement/CR2A. They don't have to worry about "what if my partner tries to list the house without me..." "what if my partner won't let me keep the house because they have a new girlfriend" or any other anxiety-producing scenarios that used to end up with everyone fighting in court, paying two lawyers legal fees to settle a fight that could have been avoided. 

As you can see, the newer rules and best practices around Settlement Agreement/CR2As help couples avoid conflict and uncertainty around their house during a divorce. With a Settlement Agreement/CR2A, couples have more options to keep the house for their children than they used to, back when their only choices were "sell the house right now and split the equity" or "file for divorce and then try to refinance in one partner's name." 

About the Author

Elizabeth Steen

Elizabeth Steen is licensed in Washington State as well as Washington D.C. After work, Elizabeth enjoys making her West Seattle renowned flan recipe with her daughter, which she’s willing to share with favorite clients. She also enjoys hiking, yoga and chasing her family’s fantasy football league title every fall.

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