By Julie Garrison
Special to DadsDivorce.com
Even more perplexing is what to do with the marital home.
For many divorcing couples, the house, which was once their greatest financial asset, has become their biggest liability. A couple who purchased their home at the peak of the housing boom is now saddled with a house that is worth less than what they owe on it.
So couples are looking for financial advice on divorce and wondering what are the available options for dealing with the marital home?
If one spouse moves out and wants off the deed, the other spouse is going to have to refinance the mortgage. Otherwise, if they keep the mortgage in both names and one of them stops paying, the other spouse is liable for the monthly mortgage payments and late charges.
So the reasonable option is refinancing, if one spouse plans on staying in the house. But with a mortgage underwater, can this even be done?
The couple can stay in the house and live separate lives. This, of course, is the definition of insanity, but there are those couples who have successfully pulled it off.
The two estranged spouses continued to cohabitate until the house sold and put them in a better financial position for re-establishing themselves. But, this would be viewed as a worst-case scenario dilemma.
It must be reiterated if both spouses are on the mortgage, it’s probable that neither spouse will be able to get another mortgage until the house sells.
Another plus on the side of staying in the house is that if one spouse moves out and the spouse staying in the house quits making payments, the spouse not living in the house would still be responsible for the mortgage payments.
3. One Stays, One Leaves
The one spouse who stays in the house and continues making mortgage payments will get credit for the principal paid prior to the sale of the house. The spouse who moved out and rented will still get credit for half of the proceeds of the sale.
Of course frequent readers of DadsDivorce.com know you should not leave the marital home. This is one of the “10 Stupidest Mistakes Men Make When Facing Divorce” as outlined in Cordell & Cordell founder Joseph Cordell’s new book.
Moving from the marital home increases your monthly bills and leaves you in a powerless situation with regard to what occurs in the home and with any belongings you leave there.
4. Defer the Sale
A couple can also defer sale of the house until a specific date, in the hopes that home values will rise. Both parties will still be on the deed, but one spouse will move out. This will be part of the final court order.
Still, if the spouse staying in the house defaults on the mortgage payments, the other party will end up being responsible for them.
The spouse not residing in the co-owned property will be unable to get another mortgage unless he or she makes enough money to make payments on both loans in the event that the co-owned property goes into default.
This option is not the best one and carries with it a great deal of liability.
Another possible choice is for the couple to move out of the house, go their separate ways and rent out their co-owned property. As long as they can keep a responsible renter in the house, this scenario is a good one.
They can wait for property values to rise (in the hopes that it will still happen within the next few years) and sell when the economy picks up again. Of course, this can be risky considering that you have no proof that the economy is going to turn around.
Again, this scenario would probably prevent both spouses from obtaining a mortgage until the house eventually sold. Some lenders may extend a loan, but it will take some work to find them.
The homeowners are responsible for the loan payments, even if the renter defaults. An obvious downside to this alternative is finding financially responsible renters.
If your mortgage is under water, it’s highly unlikely that you will break even if you decide to sell the house. You may be able to upgrade the appearance and ambiance of your home and break even, but this result doesn’t happen very often.
If you are on the cusp and your mortgage is paid down enough to get out of the house relatively unscathed, you may want to consult with a couple of realtors to see what improvements can be done to raise the value of your home. You never know – you may get lucky.
7. Short Sale
A short sale is when an agreement is made with the lender to sell the house at a loss. This has less negative credit consequences than a foreclosure.
In favor of this alternative, the Obama Administration, under an expansion of the Making Home Affordable Program, is offering first mortgage lenders a $1,000 incentive for each completed short sale and up to $1,000 more to share the cost of paying any second-mortgage lenders to release their claim on the property.
In other words, if a home has a home equity loan or home-loan line of credit, the investors who own the primary mortgage may pay those who hold the second mortgage a certain amount to settle that loan. The government will offer $1 for every $2 paid by the investors, up to $1,000.
Homeowners also benefit from this arrangement. They can get up to $1,500 for relocation expenses.
There are a few caveats to going the short-sale route.
First, your credit is going to be effected negatively when you undergo a short sale. It sounds better than a foreclosure, but it is negative nonetheless.
Also, the lender may come after you for the difference of what the house sold for and the amount of the original loan.
Usually the lender will try to get the homeowner to sign a promissory note for the difference between the amount the house sold for and the amount of the loan. This “deficiency judgment” is banned in certain states.
So lenders in those states are more liable to require a borrower to sign a promissory note prior to granting the short sale.
8. Walk Away
Sometimes foreclosure is the better of two less-than-desirable alternatives. In foreclosure, there is a “redemption period,” which is a period of time that the homeowner can remain in the property before the bank can evict him.
Depending on the state you live in, the redemption period is between a year and just a few days. The redemption period can help the couple save money before they are required by law to leave the house.
One party could move out and rent, while the other stays in the house during the redemption period. The party staying in the house could be court ordered to pay half of the exiting party’s rent until the house sells and both parties are renting or purchasing separate residences on their own.
Julie Garrison has been writing articles and short stories for the past 10 years and has appeared in several magazines and e-zines.