Couples who wish to divorce but can’t sell or refinance the family home have a special obstacle to dissolving their relationship. Normally you would just sell the property or the party keeping the home would refinance the mortgage and release their ex from the obligation. But when you owe more than you could sell the home for this becomes impossible.
Some couples agree that one keeps the house and takes over the mortgage, with the stipulation that the occupying spouse refinance or sell within a specific time. In this case, the non-occupying spouse should remain on the home’s title until the refinance or sale is complete. Signing a quit-claim (relinquishing your interest in the property) only means that you no longer have any ownership interest — but you’re still on the hook for the mortgage payments. And keep in mind that any agreement between the two of you–even sanctioned by a judge in divorce proceedings–carries no weight with your lender. And while judge can order your ex to refinance the property, he or she can’t force a bank to lend if it doesn’t want to. What an agreement can do, however, is give you the right to sue your ex in the event that the mortgage payments don’t get made and you have to come up with the money.
Another less-than-perfect option is to rent out the home while continuing to own it together–as business partners, not husband and wife. Consult an attorney about creating a business (for example a corporation or limited liability company), transferring the home into it, and dividing the expenses, income, and tax deductions between you.
If you can afford to do so, refinancing or selling, even if you have to bring cash to the table, is probably be the best option. In fact a judge could conceivably order you to do just that. Talk to a good lender about which programs will allow you to finance the most of your home’s value–you might be surprised at how high the new FHA or Fannie Mae programs will allow you to go.
While “winging it” and hoping your ex makes all the payments as agreed may be the cheapest solution it’s also the riskiest. You have a lot to lose in the event of a foreclosure. The lender may even come after you for the difference between what you owe and what it is able to sell the property for (this is called a deficiency and is legal in 48 states as of this writing). Your credit will be trashed, potentially affecting your ability to get financing, insurance, even jobs.
If you can’t afford to bring in cash, you may be in a position to make a deal with your lender. Replacing the old loan with a new one obligating one party is referred to as novation, but this rarely happens unless the occupying spouse has great credit and plenty of income. There are other allowances a lender can make, and not all lenders require you to be delinquent on your mortgage before approving a loan modification or short sale. Speak with your lender / mortgage servicer about a short sale, and enlist the services of an experienced real estate agent or attorney who specializes in arranging these transactions.
The next post will look at available loan programs most helpful for refinancing underwater mortgages.
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