Avoiding Foreclosure During Divorce

When a married couple takes out a home loan to buy a property, they often get the loan and jointly take the title to the property. If the couple later divorces, the issue of what will happen to the home can get complicated. If no one makes the mortgage payments, a foreclosure could start.

If you're going through a divorce, options are available that will allow you to dispose of your home, as well as alternatives if one spouse wants to keep the property. Figuring out what you want to do with the place early in the separation can ultimately help you avoid foreclosure.

Options If Neither Spouse Wants to Keep the Home

If you and your soon-to-be-ex don't 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. Selling the place is probably the easiest way to put the joint debt behind you. Unfortunately, if you're underwater on the loan, it might be difficult to sell the property for a price that will pay off the debt. In this situation, your lender might agree to a short sale or a deed in lieu of foreclosure.

Rent Out the Home

If you find that you're unable to sell the property or complete a deed in lieu of foreclosure, sometimes, a viable option is to find tenants for the property. Then, put the rental income toward paying the mortgage loan. The downside to this option is that the divorcing couple remains responsible for the property, and the mortgage debt, 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 property, here are some options.

Assume the Mortgage

If one spouse wants to keep the house, that spouse can usually assume the mortgage and take over responsibility for the loan.

While many home mortgages have a "due-on-sale" clause, one spouse can generally assume the loan because of a federal 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 the mortgage contract has a due-on-sale clause, the loan usually can't be assumed.)

Under the Garn-St. Germain Act, lenders may not enforce a due-on-sale clause if 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)).

Refinance the Mortgage

If one spouse wants to keep the property, another option is for that spouse to refinance the property in their sole name. With a refinance, the co-borrower is released from the debt. In many cases, the terms of a divorce will require one spouse to refinance if that person wants to keep the home.

Refinancing is generally possible in cases where:

• the mortgage isn't underwater
• one spouse has sufficient credit and income to qualify for a refinance, and
• the other spouse agrees to give up the house.

Refinancing might not be possible if the property is severely underwater or you're already delinquent on payments for your current loan.

Loan Modification

If assuming the mortgage and refinancing aren't viable options, another alternative if one spouse wants to keep the home (but can't afford the current payments) is to apply for a loan modification.

A "loan modification" is a permanent restructuring of the mortgage loan where one or more of the terms of a borrower's loan are changed to provide a more affordable payment. With a modification, the lender may agree to do one or 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 the length of the term of the loan.

If both spouses signed the original loan documents, then both spouses might have to sign off on the modification. If one spouse won't agree, this refusal can kill the deal.

But once a divorce settlement is finalized and one borrower is awarded the property, then that borrower can apply for a modification without the other. If that borrower qualifies for a modification, the co-borrower might be released from liability on the loan, and they won't need to sign off on the modification (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 probably won't be approved.

When to Hire an Attorney

Agreeing on any of these options can be difficult during a divorce, especially if the separation is contentious. If you're trying to avoid foreclosure during divorce, talk to an attorney who can inform you about the different options that are available and can help you dispose of or retain the property.