Handling an Upside-down Mortgage in Divorce
It’s a tale as old as time: a couple weds, works hard, saves, buys their dream home, but as life takes unexpected turns, the marriage may come to an end. Divorce is never easy, but for many couples, there is an added complication when their property is worth less than what is owed on the mortgage.
The so-called “upside-down properties” can be one of the most difficult assets to handle in a divorce. However, the issue is manageable, and seeking seasoned legal experience can help you to ensure that your next steps land you in your best possible position as you move forward into your chosen future. This article will go through some general points on managing an upside-down mortgage while going through a divorce..
How Division of Property Normally Works
When a divorcing couple owns a house worth MORE than the mortgage, one of two things usually happen:
- The couple sells the house as part of the divorce agreement and the mortgage is paid off, the profits divided between the former couple.
- One spouse buys out the other spouse and keeps the home by refinancing the loan in their name only. The spouse who is removed from the loan has no further responsibility for the mortgage or the property.
Neither of these options is feasible when the home is upside down because there is no equity to divide.
When a Mortgage is Upside-down
When a couple owes more than a house is worth, one of four solutions is usually chosen:
- One spouse keeps the house with an agreement that they must refinance within a specific period of time. Remember, both spouses are still responsible for the mortgage until the house is refinanced, and both spouses should remain on the title to the property until that responsibility shifts. Refinancing will be possible through most lenders only when the house regains enough value to make it worth more than the mortgage. The spouse refinancing the home must also qualify with sufficiently good credit and income to carry the loan.
- The spouses hire an attorney to negotiate the ability to perform a short sale on the property. Short sales allow a property to be sold for less than the mortgage balance, and act to forgive the amount still owed on the mortgage. Banks sometimes accept requests to perform short sales if the bank still perceives that it will receive a substantial amount on the mortgage. This is even more likely to be approved if it seems likely that the house will otherwise fall into foreclosure.
- The spouses create a partnership or limited liability company and transfer the house into that LLC/company. In this option, both spouses keep paying on the mortgage and the house can be rented out. The profits or losses are passed on the spouses and accounted for on their individual tax returns. It is important to note that this will only be possible if both spouses can (and will) keep paying the mortgage.
- Move out of the property and let it go into foreclosure. This option is available but does come with benefits and long-term consequences that should be further discussed with experienced counsel.
Contact Cardwell Steigerwald Young, LLP
Our experienced San Francisco property division attorneys at Cardwell Steigerwald Young, LLP can help you through every step toward your new future at the other side of a divorce. Our experienced team can work with you to develop a strategy to help you land with your best foot forward – contact our office today to discuss your own case.
Sources:
finance.yahoo.com/personal-finance/mortgages/article/when-will-housing-prices-drop-outlook-as-home-inventory-rises-161956887.html
moneytalksnews.com/slideshows/states-where-the-most-homeowners-are-underwater-on-their-mortgage/
