Under most circumstances, courts can only divide marital property, which is property acquired during the marriage that is not the separate property of either spouse. Though laws vary by state, separate property typically includes assets acquired by gift, inheritance or before marriage. Whether a home is mortgaged or not, if it is marital property, its equity is considered a marital asset and divisible by the divorce court. Though the court must apportion even a small amount of equity between the spouses, a paid-off house may have quite a bit of equity to be split.
Community Property Vs. Equitable Distribution
States follow either community property or equitable distribution laws when dividing property between spouses. In community property states, marital property may be split 50-50 under state law, but equitable distribution states require judges to consider a list of factors, such as the length of the marriage and the contributions made by each spouse, before deciding how to split a couple’s property. In an equitable distribution state, the spouse not retaining the home might be entitled to more or less than a 50 percent share of the equity.
Keeping the House
The house does not have to be sold simply because the owners divorce. When one spouse keeps the house, the court can award a higher proportion of other assets to the other spouse, balancing out the value in equity received by the spouse who keeps the home. The spouse who keeps the house could also buy out the other spouse’s share in the property, taking out a mortgage if he is unable to pay cash for his spouse’s share.
Selling the House
A divorce court can order the spouses to sell the home, particularly if they cannot reach agreement about it. For example, the spouses may be forced to sell the house if there aren't enough other assets to balance out the home's equity and neither spouse is able to obtain a mortgage. Spouses might be unable to obtain a mortgage because they cannot financially handle a mortgage on their post-divorce income or because they do not have sufficient credit to qualify. If the court orders the house sold, it likely will issue an order describing the way the proceeds should be split between the spouses once the sale is final.