As if it isn’t bad enough when a divorce is looming, throw in the present state of the economy and the high number of homeowners who are underwater with their mortgages. By now most people likely understand that underwater means you owe more on your mortgage than you can sell the house for. So what is someone supposed to do when a divorce enters the picture and they’re underwater on their home?
Whether underwater or not, either the husband or the wife can do a quitclaim deed and give their interest in the house to the other. However, if both the husband and wife are named on the mortgage document, they will both continue to be responsible for the mortgage even after a divorce. So if the person who ends up with the house doesn’t pay, the mortgage company will likely come after the other party even though they no longer own the home. The way to avoid that situation is for the person who gets the house to take out a new mortgage in their name only and pay off the old mortgage, assuming they would qualify for a new mortgage on their own. But there’s a catch – remember, we were talking about homes that are underwater. It’s possible that the home will no longer appraise high enough to be able to get a mortgage large enough to pay off the old mortgage.
So, what if neither party wants the house? The obvious answer is to sell it. But again, remember we said the house is underwater. The solution in that case could be a short sale. To qualify for a short sale, lenders normally require you to have a hardship such as divorce, job loss, or major medical expenses. Your agent would negotiate with the lender to accept an amount less than what is owed. The home would be listed and sold but the lender would have to agree to accept the amount offered by a buyer. In some states the lender could then come after the seller for the shortage. It depends on whether the state is a recourse state or not. Minnesota is a non-recourse state so the first mortgage holder normally will not try to recover the shortage (in some cases they can). If there are junior lien holders, they too become part of the negotiation process. If you’re considering a short sale, you should find a real estate agent who is qualified to handle it for you. Look for one with either an SFR (Shortsale Foreclosure Resource ) or CDPE (Certified Distressed Property Expert) certification. You should also consult with an attorney as well as a tax professional. Both should be well versed on short sales. Short sales are complicated and time consuming. A short sale will almost always take longer to complete than a traditional sale, especially when there are multiple lenders involved. It’s still better than allowing the home to go into foreclosure. Yes, a short sale will damage your credit but not as much as a foreclosure will.
We’ll discuss foreclosures and bank owned (REO, or real estate owned) properties in more depth in future articles. In the meantime, if you have questions regarding short sales, foreclosure, or bank owned homes, I do have an SFR certification and I’d be happy to help.
Disclaimer: this article is not intended to be legal advice. If you desire legal advice, please consult with an attorney.
- What is a short sale? Five things you need to know. (csmonitor.com)
- The lowdown on short sales, what is a short sale? (goldenanswerman.wordpress.com)
- 5 Tips to Deal With a Divorce in A Downturn (bankrate.com)