Divorce requires decisions about everything in your life, including the house. What should we do with the house during a divorce? Years ago the solution was simple, you either sold the house and split the proceeds or one person refinanced the home into their name only and paid off the other person.
Those options are not available for many divorcing couples in today’s real estate market. Selling the home may not be possible because the balance of the mortgage is higher than the value of the home, this is often called an "underwater mortgage." Re-financing is also difficult, even if one person’s income is high enough to qualify for a a new mortgage, the home still needs to appraise high enough to obtain that new mortgage.
Recently, I was a contributor to an article on Fox Business News regarding Seven Big Post Divorce Money Mistakes. The article covers other financial considerations during divorce.
Unfortunately, I have now seen many cases of divorces being settled without finalizing what to do with the house. Several clients I have assisted in the past few years were issued divorce decrees simply stating that "when the property is sold, the proceeds will be divided on a 50/50 basis." The trouble is, the decrees rarely address what to do if the sellers need to bring money to the closing to buy their way out of an underwater mortgage.
Make no mistake about it, the ownership of a home and the responsibility of a mortgage are two separate issues, governed by two separate documents. The deed states who owns the house while the mortgage determines who is responsible to make payments. If you divorce and can’t sell your home because it is underwater, it is wise to know all other options.
Many people mistakenly think if they sign a quit-claim deed to remove themselves from the deed to the house, they are released and no longer responsible for the mortgage. Nothing could be further from the truth.
If you leave the house in your ex-spouse’s possession and they do not refinance into a brand new mortgage, understand if they fail to make mortgage payments, your credit rating will suffer along with theirs. If your divorce decree is exceedingly clear and states your ex-spouse is solely responsible for the mortgage debt, you might be able to clean up your credit, but may have to endure significant hardships, costs and stress while trying to restore your credit rating.
What should you do during a divorce?
- Get good advice from both your attorney and a real estate professional.
- Have a quality market analysis performed on the house to establish the current value.
- If one person wants to keep the house, try to have it refinanced in their name only.
- Seek your attorney’s advice regarding a quit-claim deed once you have been removed from the mortgage.
- Discuss and investigate the potential to do a short sale. Divorce is usually considered a qualified hardship.