Divorce and Foreclosure, What to Do!

It is no secret that financial problems are the leading cause of divorce.  Often times, a foreclosure and a divorce go hand in hand. But in spite of the rift between you and your spouse, now is the time to seriously think what the best move would be to make regarding the property you share with your soon to be Ex.   Take note, we are not an attorney, and we are not giving legal advice, but we can share with you some of your options.

We realize that dealing with a loss in your life is very stressful and when there is both the loss of a marriage and the loss of a home, through foreclosure, the stress is very high! Some of the common questions to ask are:

• Who gets to keep the house?
• Who is responsible for paying the mortgage?
• What happens if only one spouse wants to keep the home?
• What are the results of situations where no one wants to keep the home?

Each state has its own set of laws and regulations for divorce and foreclosures; we highly encourage you to see the advice of an attorney.

Refinancing

First, is this indeed community property? If so, and one of the spouses would like to keep the property, and this can be agreed upon, the spouse that wants to keep the property should refinance the mortgage which pays off the original mortgage and replaces it with a mortgage listing only that spouse.   This will release the other spouse from any liability. Otherwise, a mistake we see all too often is that one spouse agrees for the other to remain in the property and if that spouse does not make their payments, both spouses are still responsible.  This is never a good scenario for a divorced couple. If the property ends up going into foreclosure, both parties will be held responsible as far as the Lender is concerned.

Loan Modification

If refinancing is not a possibility, then the party who wants to stay in the house may be able to obtain a loan modification. A loan modification can also reduce the interest rate, but in general it will alter the terms of the mortgage to make monthly payments more affordable. If, however, a loan modification is not an option and you cannot refinance, you may need to try to sell the property. But remember, if you are divorcing and agree to give your house to your spouse, you really want to remove yourself from any financial obligations should something happen.

Beware “Due-on-Sale” Clause Complications

These clauses are straightforward when homes are sold at a profit. However, if your spouse conveys their interest in the mortgage to you (releasing them from liability and empowering you as the sole owner of the property), a due-on-sale clause could be triggered, compelling you to pay the total outstanding balance on your mortgage

Because of these clauses, refinancing is usually a better option than trying to convey one spouse’s interest in the mortgage to the other. By refinancing the mortgage, the spouse who would like to keep the property can start over with a new mortgage. They are then free to keep or sell the home without worrying about triggering a due-on-sale clause.

Selling the House and Short Sale Options

If the house has some value, it may be best for the parties to sell the property. If the house has no equity, or worse, if it is underwater, then selling the property might only result in bigger burdens for the divorcing parties. One option could be a short sale. In a short sale situation, the home is usually underwater, which means the homeowners owe more on the loan than the house is worth. In these cases, the lender may agree to accept the sale price of the home (even if it is less than what the debtors owe) and agree to forgive the remaining debt. Short sales are technical, and the advice of a real estate attorney should be obtained.

 Deed in Lieu:

If neither a general sale or a short sale are possibilities, the parties may have to consider a deed in lieu of foreclosure. In effect, the homeowners sign over the house to the lender “in lieu of” a foreclosure. In other words, the homeowners transfer ownership to the mortgage company so that a foreclosure does not happen. Sometimes lenders want to recover the amount the homeowners owe, but a lawyer can negotiate a “deed in lieu” that benefits you. Personally, I would never consider this as an option. But it is an option.

Both Spouses Want to Keep the House

If both spouses want to keep the home, it should be noted that there are risks associated with both divorced parties having legal rights to the home, especially if there is a chance of the home going into foreclosure. 

If the divorce is a contentious one, that will require the court to get involved and make determinations, then both spouses probably should not keep the home. If the court gets involved, a quick sale may be needed which could be costly for both parties. 

The Consequences of Foreclosure after Divorce

Regardless of the reason, in any situation, it is way better for ALL parties to avoid a foreclosure at all costs. A foreclosure will haunt you for many years to come!

Regardless of any hard feelings you may have, now isn’t the time to let your emotions dictate to you.  That could cost you money!  A lot of money!  If a sale, short sale, or any other option can save both of you money, do that! The best thing to do is cut all financial ties in the most profitable way to move on with your life. Do NOT forget that a foreclosure will hurt you as well as a co-borrowing spouse and impact your ability to move on with your life.

Take all steps to AVOID foreclosure after divorce. Call Real Estate Help Center! We are here to help!