When a recession hits, divorce rates spike. Divorce often plays a major role in real estate transactions and decisions. The question posed today is 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.
Well, here are your choices:
1. You stay in the house with your divorced spouse until either one of you can afford to move out or refinance. Seriously!? Yes! More and more people are doing so in this new economy because there is simply not enough money to go around. I know of divorcing spouses creating separate living quarters in a house, akin to an in-law suite with separate entrances, etc.
2. 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, the couple will still own the house together.
3. Refinance. If you try to refinance, 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.
4. 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 you get released from the balanced owed. With the enactment of the new Obama short sale regulations, which I wrote about previously, 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.
5. You let the home go into foreclosure. This is not an ideal situation and it’s not generally recommended.
6. Loan modification. 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.
From a real estate perspective, preserving the value of the property is paramount and in the best financial interests of both spouses. The options are tough for those in the unfortunate predicament of divorcing in this recessionary economy.
By Attorney Richard D. Vetstein for Boston Real Estate Now, Boston Globe December 9, 2009