One of the questions we hear frequently when people are contemplating divorce is What if we’re getting divorced and are upside down on our home?
If you’re lucky, you’ll have equity in your home, money in the bank, and a couple of retirement accounts when you divorce. In that situation, you’ll be more at ease after the marital assets are divided. With the booming housing market, most couples going through a divorce have equity in their homes simply because of massive market appreciation, even if they paid little down, recently purchased, or recently refinanced However, this is not the case for everyone. Moreover, if the housing market makes what some feel is an inevitable correction, the situation will quickly change, leaving many divorcing couples with no or negative equity in their homes. In years past, after a market downturn, the majority of all divorcing couples have come to court with negative home equity. It changes the entire dynamic of reaching a settlement, or ruling on a case at trial.
There is never a “good time” to divorce for many jaded spouses. And, if dissatisfied spouses put off divorcing because they’re waiting to develop equity in their homes, they could be waiting for years. So, many of them simply pull the trigger and strive to make the most significant decision possible regarding the marital residence, even if it is inverted.
What is an Upside-Down Mortgage, and how does it work?
An upside-down mortgage is when a home is worth less than the amount owed on it. It is most likely to occur when the real estate market dips or even crashes. When married couples want to divorce but can’t afford to sell their property because they owe more than the market’s worth, an upside-down mortgage puts them in a bind.
While a foreclosure or short sale are two possibilities to get out of an upside-down mortgage, the major drawback of either is the harm done to people’s credit ratings.
When a House Has Zero Equity
When a house has zero equity (another common way of saying it is upside-down), this may not be a problem for families who do not want to move. However, it might be a problem for divorcing spouses who cannot sell their homes. So, what are they going to do now?
Chapter 13 bankruptcy, foreclosure, or short sales all negatively influence people’s credit ratings. Though not always ideal or possible, the following methods avoid damaging one’s credit:
- Waiting until the mortgage is no longer upside-down, with one spouse staying in the house until then
- The couple leases out their house and then sells it when the market improves.
- The couple sells the house at a loss and makes up for the shortfall with other assets
Keep in mind that until a refinance is available, both parties are responsible for the mortgage (assuming they were both on the mortgage in the first place), and both spouses will remain on the house’s title. Only when the house regains enough value to make it worth more than the mortgage will be refinancing be conceivable. A refinance will only work if the spouse who keeps the house has strong credit and enough income to pay the mortgage after it is refinanced. Moreover, if a home is upside-down, one spouse may not be able to reapply for a mortgage in their name because there will be no equity, unless they have the cash to cover the difference on the previous mortgage.
Keeping your credit safe
Divorce is an emotional and frequently volatile experience, but experts say one of the the worst things a person going through a divorce can do is seek financial revenge. It is not uncommon for one spouse to try to destroy the credit of the other out of bitterness. This could be, by example, refusing pay bills that are in joint names but which one party is responsible for by agreement or court order. This severely harms the credit of the other party and could prevent them from getting a mortgage.
It is advisable whenever possible to continue making all payments on bills during a divorce, to protect the credit of both parties. It is also usually suggested by experts to close joint accounts whenever possible and open individual accounts. That will reduce the chances of squabbling over joint debt.
What are Some Separation Agreement Solutions for Dealing with an Underwater or Upside Down Home?
Skilled family law attorneys can draft a separation agreement that can save a couple’s house or, at the least, keep each party from ruining their credit or declaring bankruptcy. Short sales, deed in lieu of foreclosure, or clever financing arrangements are some options for dealing with an underwater home. There are a slew of additional options for dealing with a divorced home that is underwater. Couples must understand that they can reach an agreement that benefits both parties in the long run.
If your house is underwater and you want to divorce, you should contact an expert family law attorney right once. You have options that could save you money, headaches, and anxiety.
So if you ar e faced with the question, what if we’re getting divorced and are upside down on our home? And have questions about a divorce or need help? Contact our Concord, New Hampshire divorce attorneys.
