The end of a marriage includes a distribution of shared property, but asset division also includes dividing debt between divorcing partners. The home a couple shared through marriage was once seen as a desirable asset during divorce. Since the collapse of the housing market, the asset has now turned into a burden for some.
Couples in New York and across the country who divorce often are bound together by a mortgage. When the values and prices of homes were more in line with the equity owners had in them, divorcing couples frequently opted to sell the property and split the proceeds. Some couples would refinance and agree to let one spouse own the home. Keeping the house was viewed as an asset victory in divorce cases, as it was a solid investment.
Properties lost substantial value after the burst of the housing bubble, making it harder for couples to satisfy mortgages. Many couples are drowning in so-called “underwater” mortgages by owing far more to a lender than a house is worth.
The strategies to divide a marital home at divorce are the same as they once were. The difference is that more spouses are hoping to avoid taking ownership. Legal and financial advisors suggest that divorcing couples consider refinancing in one spouse’s name before parting ways. Making a property attractive to a lender for refinancing is not always easy.
Some advisors recommend applying through a federal program like the Home Affordable Refinance Program. Temporarily joining financial forces with a spouse to pay down part of the mortgage debt can improve refinancing chances.
Some financial experts recommend a short sale of the property. Lenders frown on letting homeowners sell houses for less than the balance owed, unless the mortgage is in danger of default.
Couples who have no other alternative have turned back the keys to their homes to their lender. The option is extreme because foreclosure creates a huge dent in credit history for homeowners and may take years to resolve.
A milder form of home abandonment is to agree to sign the deed over to the mortgage company. Such a settlement is still credit damaging, but a lender may go for it just to save the time and cost of foreclosing.
The inner workings of asset division during divorce, especially during hard financial times, can be very complicated and often requires experienced analysis and solid planning in order to reach a positive outcome for all parties.
Source: Nasdaq, “Underwater Mortgages and Divorce,” Nov. 11, 2011