How to Escape Your Mortgage when Going through a Divorce
Getting out from under your home mortgage is a big deal if you’re in the process of divorcing. What was once a wonderful love nest for two becomes an impediment of major proportions when you decide to split. And other financial obligations, a difficult real estate market, and other factors may compound the stress caused by a divorce. Mortgage experts say there are several points to consider when deciding what to do with your home. Among them:
1. Decide who, if anyone, can afford to keep the house.
Greg McBride, senior analyst at Bankrate.com, says first you need to decide who, if either of you, wants to stay in the marital home and if they will beable to qualify for a loan on their own based on their individual income and assets. According to Joan Iacono, a divorce and real estate attorney n Bronxville, New York, one spouse could buy the other out if they had enough equity in the home. Ernie Sturges, a Port Charlotte, Florida-based real estate attorney with Goldman, Tiseo and Sturges, says any agreement should be included in your marriage settlement, which the two parties can work out in mediation, through their attorneys or in a courtroom.
2. If one party can afford the house, take the other person’s name off the deed and the mortgage.
“If one party can afford the house, he or she should refinance it in his or her own name. That way their former spouse can be removed from the loan a be free and clear,” McBride says. Baker Cunningham, who has spent almost two decades in the mortgage business in Little Rock, Arkansas, cautions, “There’s not a loan out there that can sufficiently reduce the numbers on your mortgage to allow a person to refinance their home and pay for it on their own if they bought it in the last five years or so. However, if you can afford the payments and want to keep the home, what you should do is get the house refinanced and take the ex-spouse off the note.” (Try this refinance calculator to take a look closer at the numbers.)
Mike Dunklee, a media relations spokesman for Quicken Loans, pointed to his firm’s help guide on divorce, Managing Your Finances During a Divorce. A tip in the guide suggests homeowners who are getting out of a home in a divorce to be certain of the name on the title to the property and on the mortgage loan itself.
3. If neither one of you can afford your house alone, sell it.
“[Sometimes] the prudent thing to do is to sell the house,” McBride says. Cunningham says the sooner the house is on the market, the better off you’ll be. While awaiting the sale, Quicken’s help guides states, “Be sure and continue making the payments while the house is on the market to maintain good credit.”
4. If you can’t afford the payments, consider a short sale.
If you get into a tough spot trying to pay the mortgage and foreclosure is a possibility, you may have to consider a short sale of the property to expedite the process. “If a couple knows they’re going to have trouble…, they need to get in touch with the lender right away. Communication with the lender is one of the most important things a person with a home mortgage can do,” Cunningham says.
A short sale is an agreement with your bank or mortgage lender and it agrees to the sale of the house for less than your mortgage. Iacono says neither party walks away with any money. “In some cases, a lender may go along with a couple doing a ‘Short Sale’ and not hold the borrower responsible for any losses. A person’s credit condition has a lot to do with if they’re going to fool with the loan or not,” Cunningham says.
“A couple with good credit, up the point they went through a divorce, is much more likely to get a banker or a mortgage company to consider their situation favorably than a couple with poor credit. If the person with the mortgage problems doesn’t talk to his lender they can’t be offered a ‘Short Sale’ or some other possibility,” Cunningham says.
McBride says the best that a homeowner can do in a short sale is get out of the loan with a ‘Not Paid as Agreed’ notation, which could reduce your credit score for the next few years, but it’s a lot better than having a foreclosure on your record. “A foreclosure will ruin your credit for seven years,” Iacono says. With a short sale, “You will be free and clear of the property, provided you work out a satisfaction of mortgage agreement with the bank before the sale,” McBride says. Sturges says his job is to “work with your lender to obtain a satisfaction of mortgage if there are sufficient proceeds from a short sale of the property.”
5. Avoid foreclosure.
Whatever you do, experts don’t recommend you and your ex walk away from your home and mortgage. “No judge I know will sign off on a divorce if you tell him you have substantial debt on a mortgage and you plan to walk away from it,” Iacono says. “If you do walk away, the property will go into foreclosure, like tens of thousands of other homes around the country. That ruins your credit rating for the next seven years. And the lender can go after you and your ex legally for the remaining balances on the note,” McBride says.
6. Bankruptcy as a final option.
If the bank does not want to extend to you the possibility of a short sale, Iacono says bankruptcy could be an option. In that case, you let your ex walk away from the house, assume the mortgage in a divorce and then file for bankruptcy after you’re divorced. Sometimes, she says, you may be able to renegotiate with the bank at that time.
Don Moore is a veteran newspaper editor and reporter who spent more than 40 years working at newspapers around Florida. He recently retired from the Port Charlotte, Florida Sun-Herald. He can be reached at firstname.lastname@example.org.