Avoiding Foreclosure in the Midst of Divorce
It is very common for debt issues to arise in the midst of a divorce. To avoid losing their home to foreclosure, spouses should consider the following options.
Foreclosure Alternatives if No One Wants the Home
If neither party wants to own the home, there are a few foreclosure alternatives to consider.
Option #1: Sell the Property
If neither spouse wants to own the property, the best way to dissolve joint debt is to sell the home. However, this might not be an option if the homeowners are “underwater”—owing more than the home is worth.
If the home is underwater, the divorcing spouses have a few other options.
Option #2: Secure a Short Sale
If a home is underwater, the lender may agree to a short sale. A short sale occurs when the home is sold for less than the remaining balance of the original loan. The bank will retain the proceeds as compensation for the remaining balance.
The lender may agree to forgive the deficiency (the difference between the remaining debt and the sales price of the home). If not, the couple may remain jointly responsible for the remaining balance.
Option #3: Provide a Deed in Lieu of Foreclosure
If homeowners request the bank accept a deed in lieu of foreclosure, the lender will take possession of the home and terminate foreclosure proceedings if they have been started and promise to abstain in the future.
To be totally absolved of the debt, the agreement must state that the lender waives the deficiency. If it doesn’t, the couple could jointly be responsible for the debt that remains after calculating the fair market value of the home.
Option #4: Rent the Property
If the divorcing couple is unable to sell the home or the bank won’t accept a deed in lieu of foreclosure, they might consider using the rental income to pay off the mortgage.
However, this option will require the spouses remain joint owners of the property and continue to manage it together.
Foreclosure Alternatives if One Person Wants to Retain Ownership
If one spouse wishes to retain ownership, there are a few things he or she can do to maintain the property and avoid foreclosure.
Option #1: Assume the Mortgage
If one spouse has adequate income and stable enough credit, he or she is able to take sole possession of the home.
The spouse who is interested in maintaining the property can “assume the mortgage” from the other spouse. This will transfer the ownership entirely.
Since divorce is one of the exceptions to the “due on sale” clause, the spouses can usually work out this arrangement without consulting the lender.
Option #2: Refinance the Loan
If the spouse who is interested in maintaining the home agrees to refinance the loan in his or her name only, the other spouse will be freed from the debt.
However, there are a few stipulations to this option. The lender probably won’t agree to refinancing the loan if the home is underwater. Also, the spouse who wants to refinance must have the necessary credit and income to support the action. Lastly, the remaining spouse must agree to the deal.
Option #3: Loan Modification
If one spouse wants to own the home solely, but can’t afford the monthly payments, loan modification might be an option.
If a lender agrees to modify the mortgage, there will be a permanent change to one or more terms of the original loan:
- The lender might agree to decrease the interest rate.
- The lender might agree to change from a variable interest rate to a fixed one.
- The lender might agree to extend the life of the loan (this means the borrower will pay less each month, but will continue paying for a longer period of time).
If both spouses agreed to the original mortgage, they will both have to consent to the terms of modification. If one spouse wants to continue solo, he or she will have to take sole ownership of the property first (by assuming the mortgage) and then file for modification.
Loan modification can be tricky under the best circumstances. Engaging in the process in the midst of a divorce makes it even more difficult.
Most divorce lawyers don’t have adequate knowledge of detailed finance tasks; therefore, it would be in the couple’s best interest to also work with a Clearwater loan modification lawyer.
Foreclosure as a Last Resort
If divorcing couples see foreclosure as the only option available, they should contact a Clearwater foreclosure attorney as soon as possible. Since the legal process associated with divorce is drastically different from that of a foreclosure, the couple will need to retain two different legal specialists.
If you are contemplating foreclosure, fill out the form to the right. We’ll take a look at your current situation and help you determine the best way to move forward.