Divorce, unfortunately, often plays a major role in real estate transactions and decisions. The tough economy has added insult to injury for those unfortunate souls facing divorce in Massachusetts.
Quincy, Massachusetts Divorce and Family Law Attorney Gabriel Cheong offers great advice on his blog, the Massachusetts Divorce Lawyer Blog, about what to do if you are getting a divorce and the marital home is “underwater.” That is, when the balance on the mortgage is more than the fair market value of the house:
You’re divorcing and you need to sell your house that you own jointly with your spouse but with the recession, your house is now worth less than the mortgage that you have on it. You’re under water. You’re upside down on your mortgage. Whatever you call it, you’re stuck and don’t know what to do.
Well, here are your choices:
- You stay in the house with your divorced spouse until either one of you can afford to move out or refinance. You might be thinking to yourself that that is ridiculous. Who would ever live with their divorced spouse AFTER the divorce?! More and more people are doing so in this new economy because there is simply not enough money to go around. It’s a sucky situation but it’s a reality.
- You and your spouse continue to co-own the house together until someone can refinance the property. Either you live in the house or your spouse lives in the house. You could have a situation where only the person who’s living in the house pays for everything or everything is split 50/50. Either way, you two will still own a house together.
- You refinance. If you try to refinance, know that you will have to put up the money to make up the difference between what you owe and what your house is worth. That would be tens of thousands of dollars if not more. Some people have that kind of money but most do not.
- You do a short sale. A short sale is when you get the permission of your mortgage lender to sell the house for less than what you owe on the mortgage and hopefully, you negotiate that you won’t have to make up the difference. Know that most lenders will not extend the option for a short sale unless if you’re behind on your mortgage payments by several months. At that point, your credit would’ve taken a hit already.
- You let the home go into foreclosure. This is not an ideal situation and it’s not generally recommended.
- You try to negotiate a modification or an assumption of the current mortgage. This is very difficult and very lender specific. Some will let you modify the loan or do an assumption whereby you don’t have to refinance the house and yet be allowed to remove a spouse’s name off the mortgage. It’s worth a try.
Those are all your options. The important thing to remember is this: do not ever sign over a deed to the house over to your spouse’s sole name without also being off [released from] the mortgage. If you do so, you will have no equity interest in the property yet be liable for the mortgage (debt interest).
As Attorney Cheong outlines, it’s a tough pill to swallow for those in the unfortunate predicament of divorcing in this recessionary economy. I’ve heard stories of divorcing spouses creating separate living quarters in a house, akin to an in-law suite with separate entrances, etc.
From a real estate perspective, preserving the value of the property is paramount and in the best financial interests of both spouses (and the children). With the enactment of the new Obama short sale regulations, a short sale may be a good option for divorcing couples who are “under water.” The new regulations require that the lender agree to waive the outstanding loan balance on an approved short sale, so both spouses can wipe their credits clean of the mortgage obligations and move on with their lives.
If you are in the middle of a divorce, feel free to contact me, Richard D. Vetstein, and I can work with your divorce attorney to ensure that you’ll be protected in any refinance, short sale, loan modification, or foreclosure situation.