The Marital Home and Divorce

If after reading the previous post you have decided to let your spouse have the house so you're not left with a big monthly liability on an asset that is worth less than what is owed, there are a few other matters with which you should be aware.

The most common misperception is that when one party or the other is awarded the house in a divorce, they are not obligated to refinance the mortgage in their name alone. In other words, they get the house while you remain legally liable on the mortgage. Many people are taken aback when they learn this, and concerned about the other party's financial ability and responsibility to maintain the ongoing obligations on the property. Even where the other party is financially responsible and timely pays all obligations on the property, what about your credit profile and ability to qualify to buy your own home one day?

If the other party receives the marital home (and the mortgage, taxes and insurance), you are no longer a legal owner of the house. As part of the Judgment in the dissolution you will be required to execute an Interspousal Transfer Deed that removes you from title and places the title in the name of your ex-spouse as their sole and separate property. But this does not effect your relationship and contract with the mortgage lender. You will still be legally liable for that mortgage until it is paid or refinanced.

 But you do have legal recourse in the event of default on the mortgage. To be clear, you should insist any Stipulated Judgment or Marital Settlement Agreement contains a phrase granting the Court continuing jurisdiction on the issue of the marital home until the mortgage has been satisfied. Then, if the other party becomes delinquent on the obligation with negative results to your credit profile, you may petition the Court to order the house sold immediately or awarded to you. This does not prevent damage to your credit, but will minimize the impact.

 Credit grantors are aware of the impact of divorce on individuals, and the fact a default occurred on the fault of an ex-spouse will be taken into consideration. Mortgage lenders are also used to divorce, and many will allow you to qualify to purchase your own home even when you remain legally liable on your ex-spouse's home after a period of time. Giving the house to your spouse does not mean you are without protection and unable to buy your own home.

But when negotiating the terms of a divorce, it is important to consider whether it is prudent based on the spouse's income and financial responsibility. If your spouse does not have a solid employment history, if he or she has not typically paid bills on time and been responsible, or if their income is not sufficient, it may be more prudent to insist the house be sold if possible.

While it may be easy to make the decision to walk away from a house that is upside down, in some marriages neither party alone is capable of making the mortgage payment. In that case you are looking at a short sale or foreclosure. Many people want to do a short sale and start over, but not many are successful. The lender typically takes light years to respond to short sale offers, and buyers often run out of patience. When decisions relating to the disposition of a house in divorce become difficult, it is important to obtain help. An attorney obviously can help with structuring a judgment, and a real estate agent with extensive experience with short sales and a good mortgage broker can serve to protect you from making a wrong decision that may harm you for years. If you are in the Sacramento area call me at (916) 921-9500.

How the Economy has Changed Divorce

Until 2007 when the housing market starting taking a nose dive, the issue of who would be awarded the marital home was determined by which party had the financial means to buy the other party's interest in the property. So if at the time of trial it is determined that marital home was valued at $100,000 in excess of the amount owed, then the party with the ability to pay $50,000 to the other party would be awarded the house.

Even if neither party had $50,000 in cash to pay the other party, one side probably could refinance the house to take out the money to pay the other party if they could then afford the resulting increase in monthly mortgage payments. Sometimes both parties were in a position to do so. In addition, the "buy out" of the equity in the marital home is balanced against the division of other property. For instance, if one party received $100,000 in equity in the marital home, and the other received $100,000 in other assets, then neither party would owe the other. Debts must also be taken into account.

But in today's economy, when it comes to deciding who gets the marital home, the issue more often is who is stuck with the house? Because now we have half or more of all properties "upside down" in value. Now we have a house being awarded to one party or the other and there is not only no equity, the house is valued at less than what is owed on it. And no, the person who gets the house does not get to take it for negative value. They get it for nothing, but they are stuck buying a house for more than what it is worth!

When neither party wants the house we sell it, right? But it is difficult to sell a house that is worth less than is owed. This means a short sale. That means both parties suffer a hit to their credit. Once, the parties in a divorce sold their house and each received enough money from the sale to go out and buy a new house. Now parties let their house go into foreclosure and both have difficulty even renting a home because their credit has suffered. 

Divorces today are characterized by a house worth less than what is owed, one spouse who has lost their job or experienced a cut in pay, increased debt as a result of a loss of income, and almost nothing but personal property to divide when all is said and done. Some couples just can't afford to get divorced.