What happens to my negative equity home in a divorce?

Prior to the housing crash, a couples' marital residence was their biggest asset to be split during a divorce. Typically, one spouse would refinance the property in order to buy out the other spouse's interest in the property as well as to relieve that spouse of any financial obligation for the mortgage. Alternatively, the parties could list the house for sale and split the proceeds. Times have changed.

The crash of the housing market has dramatically affected the disposition of the marital residence thru a divorce proceeding. Instead of being an asset, most of my client's homes are now significant debts. This creates enormous problems in deciding what to do with the property in a divorce proceeding.

Because of the negative equity in most of my client's homes, the option of refinancing the property or selling it is no longer available (as most lenders require 20% equity in the property). Wherefore, there are typically only a couple of options reaming. They are: 1) attempting a short sale; 2) a deed in lieu of foreclosure; 3) foreclosure; 4) attempting a loan assumption; and 5) not requiring the spouse who will be awarded the house to take you off the loan in the near future.

The first three options mentioned will all negatively affect your credit, and as such I always counsel against choosing one of those options.

Many banks, such as Chase, have a loan assumption process that an individual going thru a divorce can apply for, by which the bank will take the other spouse off of liability for the mortgage. This process will take at least 45 days and there is no guarantee that the bank will approve it. However, when available, this is usually the best option.

The last option is to allow the person being awarded the house to not have to get their spouse off of the mortgage via a loan assumption or traditional refinance, until such time as there is adequate equity to do so. The pitfalls of this option for the spouse who is not awarded the home is that they are still financially responsible for the mortgage should a default occur down the road, and the monthly mortgage payment will show up as a liability on their credit report. This liability remaining on their credit report will negatively affecting their ability to qualify for financing, should they attempt to buy another house. I always counsel my clients to not accept this arrangement, unless of course they are the party to be awarded the property.

Hopefully, we have hit bottom in the residential home market and will be able to see a rise in the price of properties in the near future. Until then, people will continue to face difficult choices in the disposition of their marital residence while going thru a divorce.

Jason Pistiner, Esq.
SINGER PISTINER, P.C.
602-264-0110
www.singerpistiner.com
jp@singerpistiner.com