Divorce is an unfortunate situation to be in, and you probably want to get it over with as soon as possible. Unfortunately, if there’s also a home with an underwater mortgage involved, things can get even messier. Statistics say that around 50 percent of all marriages in the United States end in divorce, and more than 20 percent of all homes are underwater, so divorcing when you have an underwater mortgage is a pretty widespread problem.
Normally, when a couple divorces, the home is either sold and the money split evenly, or one of the spouses keeps the house and the equity in it will count toward their share of the assets. This is what happens when there is equity in the home, meaning that the home is worth more than when it was purchased. In case of an underwater mortgage, the home is worth less than when it was purchased, and the home has negative equity. This means that the home is not an asset anymore, but a liability, and it is much harder to decide who gets the home or how the debt will be split. Here are some solutions to divorcing when you have an underwater mortgage.
Refinancing is expensive and there’s a chance that you will be denied in your situation, but, thanks to government programs, such as the Home Affordable Refinance Program (HARP), you still have a chance to refinance your home, even if your mortgage is underwater. The best way to take advantage of this program is to refinance the mortgage under the name of only one of the spouses, then making changes to other aspects of the divorce in order to reflect the financial liability that the spouse who is refinancing is taking.
Lenders are reticent when it comes to refinancing if one of the borrowers is taken off the mortgage, even if it’s through the Home Affordable Refinance Program. You will have to make sure that the spouse who refinances has enough income to continue paying the mortgage by himself or herself.
This is the easiest way of dealing with an underwater mortgage when divorcing, but it’s also the solution that will leave the biggest black spot on your credit report. Typically, a foreclosure will stay on your credit report for up to 7 years, making it hard for you to get another mortgage loan. The foreclosure process also takes a long time, which means that it will take that much longer to repair your credit score.
If you remarry after your divorce, and your new spouse has a good credit score, you could get a new home using their credit, but you will most likely be unable to contribute to paying the mortgage with your income.
In order to sell your home for less than what you owe on your mortgage, you will have to convince the lender to allow a short sale. Lenders usually agree to a short sale when it is clear that the borrower is unable to keep making mortgage payments, which may be the case if the income from both spouses was used to make mortgage payments.
The lender might not agree to a short sale, and hold both spouses liable even if they are divorced. Also, a short sale will have a significant negative impact on both of your credit scores, and it will most likely take several years until you will be able to recover from this hit and have a good credit score again.
Deed in Lieu of Foreclosure
Another option would be to simply return the home to the lender, if they agree. You lose the home, but won’t be held liable, like you would with a short sale. This is a win-win situation, because your credit score won’t take such a big hit from a deed in lieu of foreclosure, and your lender avoids the high cost of foreclosing your home.
Another option would be to continue living in the same home with your spouse while still divorcing. This is often a bad idea for both parties involved, but if you can pull it off until you can refinance or sell your home without losing money, then you should take it into consideration. Divorce is a bad experience, and adding an underwater mortgage to that will make it even more of a mess, but there are ways of dealing with this situation that will help keep more money in your pocket.