Divorce Wisdom: The Drowning House

Back before the economy tanked, many of my divorce clients owned homes that had equity. Usually, the marital residence was an asset and not a liability. When homes were worth money, a divorcing couple had options. One party could buy out the other’s interest in the property, or the home could be sold and the wife and husband could divide the equity realized from the sale.

Sadly, in this day and age the marital home is rarely a marital asset, but is now more often than not a marital debt. So what can you do??????

First, you need to decide if the home has equity. In order to determine a home’s equity, you need to know what the home is roughly worth by doing a market analysis, or by obtaining an appraisal. Once you determine the value of your home, you need to subtract what you owe on the property from the mortgage and/or home equity loan. Your spouse will most likely be entitled to half the equity or debt owed on the residence.

But what do you do for instance when you have a mortgage totaling three hundred thousand dollars ($300,000.00) and your home is only worth two hundred thousand dollars ($200,000.00)? You need to determine if it makes sense for you or your spouse to keep the house after the divorce is final. If you and your spouse care about saving your house, preserving the house for your minor children, protecting your credit, or want to keep the home despite the divorce for any other reason here are some thoughts:

• Can one of you afford to remain in the house once you take into consideration that you and your spouse will be maintaining separate residences. Once you no longer live together, you will be paying two sets of bills?

• It is worth contacting your mortgage lender to discuss options. Let him or her know you are going through a divorce and you are trying not to let the home go into foreclosure. Discuss what steps are necessary to complete a possible loan modification.

• If you sell the home, can you and your spouse afford to bring money to the closing to pay any mortgage/home equity line deficiency created by the sale?

• If you are considering a “short sale,” how will that effect your credit? In simple terms, a “short sale” is when the bank allows you to sell your house for a price that is lower than what you owe on your mortgage.

• You may have to agree to both remain on the existing mortgage until the market improves. One party can be awarded exclusive use of the home for a period of years and the other party can retain joint ownership of the property with or without rights of survivorship until the home is sold or refinanced.

• If you are the person who is vacating the home, you need to be certain there are safeguards in place to insure the monthly mortgage is being paid while your name remains on the mortgage obligation.

• If you do not want to continue to own the former marital home with your spouse for any significant length of time, you should research whether a mortgage assumption or something similar can be accomplished after a certain time period following the divorce.

If you are one of the lucky few who have equity in your house, you need to decide if you want the home. If you want the home and you can afford it, you will need to purchase your spouse’s interest in the property if the home has value. If you and your spouse both want the home, the courts will either order that the home be sold, or the court may allow the person willing to pay the most to buy out the other party’s interest.

Assuming you can purchase your wife or husband’s interest, the next inquiry then is whether you can refinance the home in your name only, or whether you will need to keep your spouse’s name on the original mortgage for a period of time. You will need to consult a mortgage specialist to discuss your options regarding refinancing. Because the housing market is so difficult these days, your spouse may agree to remain on the existing mortgage obligation for a certain time period to avoid the costs associated with selling the property. In addition, when children are involved, you and your spouse may share a common goal of keeping the children in the marital residence for stability purposes.

In the current housing market, I find that there is not one right answer on what to do with the marital home in the event of divorce. Most of my advice is case specific. Therefore, before you make any decisions about what to do with your home in a divorce action, arm yourself with as much knowledge on the topic as possible. Contact your mortgage lender to discuss options, do research online and consider consulting with a real estate attorney in your area.