While housing markets have started to bounce back after the big crash of 2007/2008 there may be several areas that have still not totally recovered. If you purchased a home in the years before the housing bubble burst, there is a strong likelihood that you purchased at the top of the market, and the house is mortgaged currently for more that it would sell for. This is a common problem in many divorces cases in the past few years, as the marital home is often the largest asset (or debt). Further compounding the problem is that many times, both spouses’ incomes were required to afford the house, and neither party can afford the house on their own.
If this is your problem and you are afraid of the financial implications of divorcing when the largest asset is the marital home, which is financed for more than its present fair market value due to the housing bubble, there are some options:
- One spouse can “buy” out the other. If one spouse can afford to pay the mortgage and wishes to keep the house, the parties may be able to negotiate that the spouse can keep the house after the divorce (if the house is underwater, the spouse remaining will not usually have “buy” out the other spouse’s equity as they would with a normal market and house that has equity). A divorce decree can set out a specific period of time in which the spouse retaining in the home must refinance to remove the financial liability of the other spouse.
- Refinance under HARP (Home Affordable Refinance Program). This is a Congressional Act designed to help homeowners who have not fallen behind on mortgage payments, but is seeking a more stable and lower monthly payment (possibly you have an Adjustable Rate Mortgage where payments fluctuate). There are some requirements to this program, such as that the mortgage must be owned by Fannie Mae or Freddie Mac and the Loan to Value Ratio is at least 80% (the value must be no less than 80% of the loan being taken out).
- Refinance under a special refinance program with the lender or banking institution holding the mortgage. Many lenders have refinance programs which may be an option for the spouse remaining in the home that will reapportion the remaining principle owed on the home, and restart the mortgage terms (i.e. you have paid 7 years on a 30 year mortgage, the bank will refinance for the principle owed, which is usually less than the original purchase price, and restart the 30 year payoff period, thereby lowering the monthly payment).
- Short Sell the home. This refers to selling the home on the market for less than the principle owed. While the home may sell for the current fair market value, if it is less than the principal owed, the lender has to approve the sale. Most lenders will “forgive” the remaining debt, and while the spouses will not walk away with a profit, and may take a hit to their credit scores, the house will be sold.
- Rent the Home. If neither party wants to keep the home, or afford to keep it, the spouses may chose to vacate the home and rent it out until such time that the market recovers and the sale price equals or exceed this principal balance due.
We hope that you have found this information to be helpful in understanding how an underwater home could be dealt with in a divorce action with respect to the division of marital assets and debts. This is not intended to be legal advice. If you have questions or concerns about your specific case, CIYOU & DIXON, P.C. can help evaluate your specific case. This blog post was written by Attorney, Lori B. Schmeltzer.