DIVORCE IN TODAY’S HOUSING MARKET
A recession is a bad time to get divorced -- especially if your home has sunk in value along with the rest of the housing market. Last year, the divorce rate in the U.S. fell 4% after rising 7% in 2007. For most people, a house and their 401k accounts are their biggest assets. Right now, home values are down substantially from 18 months ago. According to Moody's Economy.com, 31.8% of owners with a first mortgage are "underwater" -- that is, their homes are valued at less than what's owed on the mortgages. That means couples who decide to get divorced -- and not live separate but together under one roof, an approach many have resorted to -- are splitting liabilities instead of assets.
When it comes to the dilemma of selling or keeping the family home, one issue is whether either spouse could actually qualify and refinance the home as a single, one-income household. With negative equity so prevalent today, it's virtually impossible to get refinancing, says Leslie Thompson, a certified financial planner and partner at Spectrum Management Group in Indianapolis. If the couple isn't selling the house, the spouse who is staying has to refinance the mortgage -- that's the only way the bank will let the other go. Otherwise, the departing spouse is equally liable for the entire mortgage, and, if the spouse who is in the house misses a mortgage payment, the other is liable to pay but has no claim to any equity in the house. But when there's negative equity, it's pretty much impossible to refinance.
Here are a few to consider:
Wait it out
In this scenario, the couple continues joint ownership with an agreement to defer the sale of the house. They can agree to sell the house in, say, four years or when their children finish high school in the hope that home values will rise. Under this arrangement, one spouse usually moves out.
Who should get the house? One thing to watch out for: If both spouses are on the mortgage, the one who moves out probably won't be able to get another mortgage should he or she want to buy another home. "The bank doesn't want to loan him money because he owes money on the first mortgage. His or her assets are tied up. The spouse who left could go into a rental, and when the couple ultimately sold the house, that spouse would get half the proceeds at the time of sale. If the other spouse had been making the mortgage payments, he or she should get credit for the amount of the principal paid down over the four years.
Rent out the house
More and more people are renting the house to buy themselves some time" until the market recovers. In this arrangement, both spouses move out of the home and rent the house to someone else. They're more likely to pay less for a rental than what they had been paying on the monthly mortgage. A big caveat here: This setup makes it difficult for either spouse to buy another house and move on. It forces the parties to be in transition for a long time, and they're still in a financial relationship with the ex-spouse.
Consider a short sale
Often, it's just best to sell the house, accept the loss and move on. The couple could negotiate with their lender to pay the difference between the sale price and the amount they owed or a lesser amount -- in which case they would have to determine how the debt would be paid. The lender might also agree to take the entire loss. A short sale, though, would likely hurt the couple's credit scores. Here’s what you should know about short sales before taking the leap.
1. Your credit score will tank just the same
Contrary to what many homeowners believe, a short sale can carry the same devastating impact to a credit score as a foreclosure. “If someone is unable to repay their mortgage, regardless of how that turns out, that failure to repay the mortgage is highly predictive of future risk,” explains Craig Watts, a spokesman for Fair Isaac, the company that calculates the FICO score, the score most commonly used by lenders. A short sale, a foreclosure and a deed-in-lieu, which lets the borrower transfer the property deed to the lender and walk away from their home, have the same impact on your score because they are all regarded as serious delinquencies. “When an account goes to foreclosure or a short sale, that’s as severe as can get,” Watts says.
The impact on your score will depend on what shape it was in before the short sale or foreclosure. If your credit was good — say you had no late payments before the short sale and your score was in the 700s — your score could drop by 200 points, says Watts. Your score will begin to recover after a year or two, but how soon it gets to its previous level is going to depend on how you handle your credit in the meantime.
The drop will be less severe if your score was already low because of late payments or other negative marks on your credit. So if you convince your lender to do a short sale without having a late payment on record, your credit score will tank a lot further than if you’ve been missing mortgage payments for months, as typically happens with a foreclosure.
2. The lender may come after you for the difference
Depending on the state you live in, you may have more protections from your lender with a foreclosure than with a short sale. This is particularly true in states that ban deficiency judgments in foreclosure, like California, Minnesota and Alaska.
When a short sale occurs, meanwhile, the bank will almost always try to get the homeowner to sign a promissory note agreeing to pay back the difference between the amount they owe and the final sale price. It's up to the homeowner or their attorney to try and get the clause removed and the lender to agree not to pursue any further payment by the homeowner.
3. Recovery time
In most states, a foreclosure takes at least several months — a time when the homeowner doesn’t make house payments and can create a cash cushion that will let them move on with their lives after they leave the property. In California, the foreclosure process normally takes at least 117 days with a 21-day publication period. This normally works out to be about 4 months during which you will be able to live in the residence without making a payment. If your payments amount to two to three thousand, as many do, the resulting nest egg could result in $6,000.00 to $10,000.00 in spend able cash that you did not have before.
Conclusion
Divorce is never pleasant. Many times, it is best to, after considering all of the options, walking away from a family residence that is significantly under water is often the best option in California where deficiency judgments in foreclosure are banned.
Charles M. Farano has practiced family law ,real estate litigation and criminal defense law for 31 years and is rated by Martindale Hubbell. He is certified by the National Board of Trial Advocates.
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