Divorce is tough, and divorce in a bad housing market is tougher. While you probably expect to exit the marriage with more baggage than a 747 heading for Australia, the house and mortgage may not be part of the plan.
Typically, divorcing couples have a few options when it comes to divvying up the family home: they can sell it and split the proceeds; one partner can be awarded the home; or one partner can buy the other out. The latter two options usually involve refinance mortgage loans as well.
When Both Partners Are on the Mortgage
Many people wrongly assume that, once a judge says they don't own a property or don't owe on a mortgage, they are off the hook. Not so fast. You can "quit-claim" away your interest in the family home, but your lender has no interest in weakening its position because you no longer wish to be married. It doesn't care one bit about her mid-life crisis or 20 years of his dirty socks on the floor.
Unless the partner who keeps the house refinances the home into his or her name only, both partners continue to owe the mortgage. And if you quit-claim off the property before your ex refinances, you no longer have property but you do continue to have a mortgage. That's the short end of two sticks.
What happens when your house is underwater and can't be sold for enough to cover the outstanding obligation, or can't be refinanced because there isn't enough equity? Refinance mortgage lenders aren't interested in taking on your mortgage when the home is underwater.
Refinancing in a Down Market
If one partner wants the home, he or she has some options. A Home Affordable Refinance Program (HARP) refinance, which allows you to refinance the home even if your mortgage balance is up to 125% of the property value, can get the non-resident partner off the mortgage. Consult a lawyer about sharing the negative equity. Typically, when a couple divorces, any positive equity amassed during the marriage becomes part of the property settlement. In cases of negative equity, that may be divided as well.
Another option is to have a mortgage modified through the Home Affordable Modification Program (HAMP) to make the payment affordable to the remaining spouse and get the departing one off the mortgage. According to Fannie Mae, divorce constitutes an acceptable hardship under the HAMP guidelines and can get you a modification if your income will be compromised or your expenses increased.
The Undumpable House
In some divorce situations, both parties have fantasies of moving to a big city or desert island ASAP--and that means unloading the family home. If no one wants it and you can't sell it, ask your lender about a HAFA, a Home Affordable Foreclosure Alternative, which is a government-administered program designed to expedite short sales or even deeds in lieu of foreclosure if the short sale cannot be accomplished.
Understand that this option will impact your credit score (you'll be renting that bachelor pad for a few years before you can qualify for a mortgage again), but it will get you a clean start.
Other "Creative" Options
Some homeowners have resorted to less orthodox plans for dealing with home-disposal problems in divorce. Some couples choose to own the house together as a rental property for years after the split. Just get an agreement regarding the property included in your decree. Who knows--you may find that you are better business partners than marital partners.
In the wackiest cases, divorced spouses are dividing up their family home like a timeshare long after the decree is final while they wait for real estate prices to recover. They work out charts for time alone and time with the kids and fight off icky feelings as they watch their exes dress up and date. This desperate attempt to make ends meet and avoid the financial fallout of the split proves that the family that pays together stays together--at least until they can afford to ditch each other.
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