Divorce and Foreclosure

Divorce can strain both parties financially, potentially making it difficult to keep up with mortgage payments. If neither party can afford the home on their own or cannot agree on how to handle the mortgage, foreclosure might become a looming threat.

One Spouse Wants to Keep the House

When only one spouse wants to retain the home post-divorce, they often have two primary options.

Assume the Mortgage

When a couple undergoes a divorce, and one spouse wishes to retain the house, they have a couple of primary options to consider regarding the mortgage. One such option is to assume the mortgage. This method involves one spouse taking over the existing mortgage as it stands.

Only specific mortgages, primarily FHA and VA loans, offer this capability. The main benefit of assuming a mortgage is the potential to retain a favorable interest rate from the original agreement, which can be particularly advantageous if current rates have increased.

For instance, if Sarah and Mark took out a loan at a 3.5% interest rate and Sarah, during their divorce, wishes to keep the house, she might opt to assume the mortgage to benefit from this rate, especially if rates have now risen to 5%. However, lenders typically require approval based on the assuming spouse’s financial stability.

Refinance in Their Name Alone

Another option is refinancing the mortgage. In this scenario, the spouse who wishes to keep the home takes out a new loan solely in their name, which then pays off the initial mortgage. Refinancing has its own set of benefits. This option becomes more attractive if the prevailing interest rates are lower than the original mortgage. This method also cleanly severs the financial link between the spouses in terms of the house.

For example, if Sarah and Mark had a conventional mortgage at a 6% interest rate and current rates dipped to 4.5%, Sarah might find it beneficial to refinance the home in her name alone. The process removes Mark’s financial obligation to the property. However, it’s worth noting that refinancing can incur additional costs, like closing fees, and might not be feasible if the house’s value has depreciated.

Both methods have their advantages and challenges. It’s crucial for individuals to thoroughly evaluate their decisions, considering potential interest rate fluctuations, property value, and personal finances. Consulting with financial or mortgage experts can clarify the best course of action further.

Both Spouses Want to Keep the House

This can be one of the most challenging scenarios, requiring negotiation and possibly legal intervention. Some options include:

Co-ownership

Co-ownership, sometimes called joint ownership, is when both parties in the divorce choose to keep shared ownership of the property. This arrangement often means that both names remain on the title and the mortgage, making both parties legally responsible for mortgage payments and any potential default. However, a co-ownership agreement must explicitly set out the terms of who pays what, how maintenance duties are divided, and other responsibilities.

One significant advantage of co-ownership is that it might allow children to remain in the home, providing stability during a period of upheaval. It can provide both spouses time to wait for a favorable housing market before deciding to sell. However, it can also lead to complications, especially if one party is not meeting the agreed-upon responsibilities or if future relationships come into the picture.

Example: Imagine a divorcing couple, Emily and Alex, who have two children in local schools. They decide that stability for their kids is paramount. They opt for co-ownership, where Emily continues living in the home with the children and agrees to pay the mortgage and utilities, while Alex moves out but agrees to fund major repairs. They decide that they will sell the home and split the proceeds when their youngest finishes high school.

Buyout

A buyout occurs when one spouse purchases the other spouse’s share in the property, becoming the sole owner. The purchasing spouse would typically pay the other an agreed-upon sum based on the home’s current value minus any outstanding mortgage. The amount might also be negotiated based on other marital assets or debts.

This arrangement can be beneficial because it allows one party to retain the home, often providing continuity for children or simply allowing the retaining party to avoid the hassle and emotional toll of selling a family home. However, a crucial aspect to consider here is the buyout’s affordability and the implications it might have on mortgage refinancing.

Example: Consider a couple, Mia and Leo. The current market value of their home is $500,000, and they still owe $200,000 on the mortgage. Mia wishes to keep the house. After some negotiation, they agreed that its equity is $300,000 ($500,000 – $200,000). Mia agrees to buy out Leo’s half of the equity for $150,000. This sum could be paid in cash, or Mia could give up her claim to other marital assets equivalent to that amount, like a savings account or an investment portfolio.

In both scenarios, professional mediation or legal counsel can be valuable. Dividing significant assets like a family home is complex, and ensuring that both parties understand and consent to the terms is crucial for long-term satisfaction and legal security.

Neither Spouse Wants to Keep the House

When neither party wishes to retain the property, the most straightforward solution is typically the home sale.

Sale of the Home

Selling the home is often a practical choice for divorcing couples, particularly when neither spouse wishes to remain in the house or can neither afford to buy out the other or assume the mortgage independently. The process involves putting the property on the market and, once sold, using the sale proceeds to settle the existing mortgage.

Several factors come into play during this option:

• Real Estate Market Conditions: The selling decision might hinge on current market conditions. A seller’s market, where demand exceeds supply, could lead to a higher sale price and potentially greater profit for both parties. Conversely, in a buyer’s market, homes might sit longer and sell for less than desired.
• Costs Associated with Sale: Selling a home isn’t just about listing it. Costs include realtor commissions, closing costs, and potential home repairs or upgrades to make the property more attractive to potential buyers.
• Division of Proceeds: The remaining money is divided between the spouses after settling the mortgage and other associated sale costs. The division can be equal or weighted depending on the divorce agreement or any prenuptial/postnuptial contracts in place.
• Tax Implications: The sale of a primary residence might have tax implications. In some cases, capital gains from the sale might be exempt up to a certain limit, but it’s always advisable to consult a tax professional to understand potential tax liabilities.

Example: Jordan and Taylor purchased a home 10 years ago for $200,000. Now, amidst their divorce proceedings, they agree that selling the home is the best option, especially since neither wants to remain in the house filled with shared memories. Given the area’s appreciation in property values, they successfully sold the home for $350,000.

After paying off the remaining mortgage of $100,000 and deducting sale-related expenses totaling $25,000, they are left with a profit of $225,000. They split this amount equally per their divorce agreement, providing each with $112,500. This money can then be used to make fresh starts, perhaps putting a down payment on new individual homes or securing rental properties.

In situations like this, while the sale of a home might symbolize the end of a shared chapter, it also provides both parties with tangible assets to move forward independently.

Seek Legal Advice

Property and financial disputes during a divorce can be intricate and emotionally taxing. Hiring a knowledgeable divorce lawyer can help guide you through the process, ensuring your rights are protected and you make informed decisions.

If you need assistance, consider contacting an experienced divorce attorney through LegalMatch.