Okay, we've heard about couples who stayed together "because of the children" for years before finally divorcing. But kids aren't the problem for many of today's would-be divorcees. Couples in soft real estate markets can't separate because of.........the house?
That's right, the house. Normally, divorcing couples sell their home, split the profit from the sale, and go their separate ways, or the partner who keeps the home buys out the other and refinances the home into his or her name. But what happens when the house is worth less than the mortgage balance? It can't be sold for less than what is owed (called a short sale) if the couple can afford the mortgage and the payments are current. And with zero or negative equity a spouse who wants to keep the home can't refinance and get the soon-to-be ex off the loan and out of the picture.
Think a judge in divorce court can solve the problem? Probably not, and that's why attorneys always advise divorcing couples to sever their financial connection completely. Because even if a judge says that your ex gets the house and that you are no longer responsible for paying the mortgage, your lender is unlikely to see it that way. And if your ex stops paying, the lender still has a contract with you--and in most cases the right to come after you for the missed payments.
Then, there is the equity issue. In most cases, the partner keeping the house pays the exiting spouse for his or her share of the equity in the property. When there is negative equity, the spouse leaving owes the one who stays. For example, a house worth $200,000 having a $240,000 mortgage has negative equity of $40,000. The one moving out may owe $20,000 to the spouse who stays.
Those who are destitute have more leverage with their lender--that is, they are in a position to say "restructure the loan or allow a short sale or we're walking." Additionally, government rescue programs like FHA are available to help those who could make payments under a restructured plan. The catch is that you aren't eligible if you aren't living in the house. So some spouses continue to live together while they work this out, although they might not be on speaking terms.
Next week's entries will be devoted to exploring this topic and potential solutions. Have a great weekend!
5 Responses to "Stuck with Your House and Your Spouse: Divorce and Your Mortgage Part 1"
Yes, Mary, selling up and moving out is a great solution, but if the house is worth less than what is owed you have to be able to make up the difference. Lenders have shown themselves amenable to short sales (accepting less than the house is worth as payment-in-full)only if you are already behind on your payments or have a documented financial problem and can also find a buyer. If you can afford to keep paying they don't feel a burning need to help you out--especially when it weakens their own position (by taking one owner off the loan they increase the liklihood of default); it would be irresponsible to their shareholders to make such an agreement.
Hi Jan,
Negative equity would be tallied up just like any other liability--car loans, credit card balances, and other loans all get thrown into the mix when a couple divorces. So if the couple owes $240k on a $200k house, each spouse gets $100k asset and $120k debt. Normally the judge allocates assets and liabilities between the spouses. But, again, creditors don't make their agreements with judges, they make them with the couple and if your ex-spouse defaults they do come after you if you are on the loan too.
Wow, this is an interesting post. Couldn't you just sell the house and everyone moves out?
"When there is negative equity, the spouse leaving owes the one who stays."
How would you pay the ex what you owed? Would you just continue to pay on the mortgage or would you have to set up a separate agreement? Would the divorce judge be involved here?
Thanks,
Jan
This is a great topic, especially with the current market situation. I can't wait to read more on this.