When a married couple takes out a mortgage, the couple often obtains the loan and takes title to the property jointly. If the couple then divorces, the issue of what will happen to the home can get complicated and, as a result, the couple may also face a foreclosure.
If you are going through a divorce, there are options that will allow you to dispose of your home, aw well as options if one spouse wants to remain in the home. Figuring out what you want to do with the property early on in the separation can ultimately help you avoid foreclosure. Read on to learn more about some of the various options that are available to divorcing couples.
(To learn the ins and outs of the foreclosure process, and foreclosure procedures in your state, visit our Foreclosure Center.)
Options If Neither Spouse Wants to Keep the Home
If you and your soon-to-be-ex do not want to keep the home, here are some options for avoiding foreclosure.
Sell the Home
If neither party wants, nor can afford, to keep the home, one option is to sell the property. This is probably the easiest way to put the joint debt behind you. Unfortunately, if you are underwater (where you owe more than the home is worth), it may be difficult to sell the home for a price that will pay off the debt.
If you are underwater, your lender may agree to a short sale or a deed in lieu of foreclosure.
Get Your Lender to Agree to a Short Sale
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the lender agrees to accept the proceeds, which fall short of paying off the total mortgage debt. In some cases, the difference between the sales price and the mortgage debt will be forgiven. In others, the lender may require that the spouses remain jointly liable for the deficiency (which is the difference between the sales price and the total debt). (Learn more about short sales to avoid foreclosure.)
(To learn more about deficiency judgments, see our Deficiency Judgments After Foreclosure area.)
Get Your Lender to Agree to a Deed in Lieu of Foreclosure
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing. (Basically you give the home to the lender and it agrees not to foreclose.)
To avoid a deficiency judgment with a deed in lieu of foreclosure, the agreement must expressly state that the transaction is in full satisfaction of the debt. (With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt.) If the deed in lieu of foreclosure agreement does not contain this provision, the lender may file a lawsuit to obtain a deficiency judgment. (Learn more about deeds in lieu of foreclosure.)
Rent Out the Home
If you find that you are unable to sell the property or complete a deed in lieu of foreclosure, sometimes a viable option is to find tenants for the property and then apply the rental income towards the mortgage. The downside to this is that the divorcing couple remains responsible for the property, as well as the mortgage, and will have to work together to manage the rental.
If One Spouse Wants to Keep the Home
If one party in a divorce wants to keep the home, here are some options for doing so and avoiding foreclosure.
Assume the Mortgage
If one spouse wants to keep the house, that spouse can assume the mortgage and take over responsibility for the loan. (Though you’ll have to prove that you have sufficient income to make the monthly payments.)
While most home mortgages have a “due on sale” clause, one spouse can still transfer the property and assign the mortgage entirely to the other spouse without the lender’s consent because of a law called the 1982 Garn-St. Germain Act. (A due on sale clause states that upon a sale or conveyance of the property, then the full loan balance will be accelerated and the entire balance of the loan must be repaid. If there is a due on sale clause, the mortgage usually cannot be assumed.)
Under the 1982 Garn-St. Germain Act, lenders may not enforce a due on sale clause if a mortgage or the property is transferred as a result of a divorce decree, legal separation agreement, or a property settlement agreement (even if the mortgage is in default) (12 U.S.C. § 1701j-3(d)).
Even if your name was not on the mortgage, once you receive title to the property and obtain lender consent, you may assume the existing loan.
(Learn more mortgage assumptions and due on sale clauses in our article Avoiding Foreclosure: Can Someone Else Assume (Take Over) the Mortgage?)
Refinance the Mortgage
If one spouse wants to keep the property, another option is for that spouse to refinance the property in his or her sole name. This way, the co-borrower is released from the debt. In many cases, the terms of a divorce will require one spouse to refinance if he or she wants to keep the property.
Refinancing is generally possible in cases where:
- the mortgage is not underwater
- one spouse has sufficient credit and income to qualify for a refinance, and
- the other spouse agrees to give up the house.
Refinancing may not be possible if the property is severely underwater or you are already delinquent on payments for your current loan.
If assuming the mortgage and refinancing are not possible, another option if one spouse wants to keep the home, but cannot afford the current payments, is to apply for a loan modification.
A loan modification is a permanent restructuring of the mortgage where one or more of the terms of a borrower's loan are changed to provide a more affordable payment. With a loan modification, the lender may agree to do one of more of the following to reduce your monthly payment:
- reduce the interest rate
- convert from a variable interest rate to a fixed interest rate, or
- extend of the length of the term of the loan.
If both spouses signed the original loan documents, then both spouses will have to sign off on the modification. If one spouse won’t agree, this can kill the deal.
However, once a divorce settlement is finalized and one borrower is awarded the property, then that borrower can apply for a loan modification without the other. If that borrower qualifies for a loan modification, the co-borrower may be released from liability on the loan and his or her signature will not be needed, subject to any provisions in the divorce decree. (For example, if the divorce decree states the remaining borrower must refinance to remove the co-borrower from the mortgage, then a loan modification will not be approved.)
(To get information about loan modifications and other options to avoid foreclosure, see our Alternatives to Foreclosure area.)
When to Hire an Attorney
Coming to an agreement on any of these options can be difficult during a divorce, especially if the separation is contentious. If you are trying to avoid foreclosure during divorce, it is recommended that you seek the assistance of a qualified attorney who can inform you about the different options that are available and can help you dispose of or retain the property.