What You Need to Know about Foreclosure When Going Through a Divorce
Due to the additional financial burden often caused by a divorce, many couples ending their marriages are also forced to foreclose on their homes. But divorce doesn't necessarily have to mean mortgage default. Even if you’re experiencing financial problems during a divorce, there are certain steps you can take to try and avoid losing your home.
The first step is to make sure bills are being paid while you’re in the process of your divorce. In particular, it will be crucial to determine who makes the mortgage payment when you’re splitting up. Legally it’s the person(s) whose name is on the mortgage—aka, lien on the property—and promissory note, or paper saying you agree to pay what you owe. Often it’s both the husband and wife who've signed the documents jointly, but it’s not unheard of to have just one sign or even neither at all (for example, the home may be owned by a third party, such as a family member).
After you determine who needs to be making the payments, think about whether you want to stay put in your home or move on. Whichever you choose, remember that there are options out there that will protect your credit and your finances. Consider the following:
Scenario #1: Only one of you wants the home.
There are several options for transferring ownership of the house to just one spouse:
Refinance the mortgage.This is an appealing option for those who own the home jointly and whose house is worth more than the money owed on the mortgage. Refinancing enables you to remove your ex’s name from the paperwork so you can take full ownership of the home—as well, therefore, of complete responsibility for the mortgage debt. One caveat: Refinancing means the terms of your mortgage (i.e., interest rate, length of loan, etc.) may change, and so will your monthly payments. Make sure you have enough income to make the mortgage, insurance and property tax payments as well as maintain the house.
Assuming the mortgage. “Assuming the mortgage” is a technical term for giving you responsibility of the existing mortgage (and sole ownership of the home). While many mortgages have a clause against this, divorce decrees often void that clause and allow an assumption of the mortgage by one spouse. If you ex’s name is on the paperwork but yours isn't, this may be an option to explore. One obstacle is that you have to show the lender you have enough income to make the mortgage payments.
Loan modification. This is a situation in which the original mortgage is modified (i.e., there are reduced monthly payments, a longer term, etc.) to make it more affordable for the spouse wanting the house. Things get complicated, however, if one spouse won’t sign off on the agreement or if your divorce paperwork states the house must be refinanced so as to remove your ex from the original mortgage.
Scenario #2: Neither of you want the home.
If neither spouse wishes to reside in the home, there are several options:
Sell the house. If your home is worth more than you owe on the mortgage, you can simply put it up for sale. Of course, whoever is legally responsible for the mortgage payments will have to continue making them until the home is sold and closed on.
Short sale. If your home is underwater—meaning you owe more on your loan than the home’s market value—consider a short sale. With a short sale, your mortgage lender agrees to take what the home sells for, even if it’s less than what you owe. You may be liable for the balance (called a “deficiency judgment”), but in many cases the mortgagor will work with you to come up with a mutually agreed upon reduced debt or a lump sum you can pay off. And if you live in California, consider yourself fortunate: that state prohibits deficiency judgments after short sales. However, short sales have their downside: besides the fact that they often take a long time to complete and can have a negative impact on your credit score, the balance you owe on the home—even if it’s forgiven by the lender—is taxable.
Rent it. You can rent out your home and apply the rental income to the mortgage, with any additional profits divided according to terms laid out during your divorce. One challenge is that the property will still have to be managed (for example, someone will need to be available when the toilet clogs or the driveway needs shoveling), so this option works best when you’re on a good terms with your ex.
Deed en lieu of foreclosure. Another legalese term that means the lender gets ownership of your home while you are released of the debt. If there’s a balance owed, the lender may absolve you of it or work with you to reduce the amount.