It is not uncommon for divorce to coincide with foreclosure.
Navigating a foreclosure during divorce will largely depend upon when the mortgage was obtained. If the mortgage was obtained before a marriage, it will likely only be the responsibility of one spouse. Thus, for the purposes of this article, it will be assumed that mortgage was obtained after the couple married and both couples signed the loan document.
The laws governing divorce and foreclosure will vary from state to state. Ultimately, however, there are three general situations couples whose marriage is ending are facing.
If one spouse wants to keep the house, that spouse can typically do one of these things:
- Assume the mortgage
- Refinance in their name alone
- Apply for a loan modification
If a spouse assumes the mortgage, they may need to demonstrate they can afford payments on their own to avoid foreclosure. Many mortgages contain a due on sales clause; however, under federal law, this clause is not enforceable if the property is transferred as the result of a divorce.
Moreover, a spouse can also refinance the home in their own name, therefore releasing the other spouse from liability. However, refinancing may not always be available, and particularly if the couple is struggling financially and foreclosure is closely looming on the horizon.
Even if a spouse may not be able to assume a mortgage as it is, and is not capable of refinancing due to the mortgage being severely delinquent in payments, one final option is for the spouse who wishes to keep the home to apply for a loan modification. Because a lender would rather continue to receive some type of payment over initiating a foreclosure, this option is common for borrowers in financial trouble. However, it is worth noting that before a lender will be able to modify a loan agreement, both parties to the loan will have to agree. While sometimes one spouse may be happy to release the mortgage to the other, this may not be the case where a divorce is not amicable or where both spouses want to keep the house.
This scenario, particularly if both spouses wish to remain in the house, is not ideal for either party, particularly if foreclosure is inevitable. This may require a court to intervene, and even require the sale of the property. Thus, an otherwise uncontested divorce may turn into a contested one, raising legal fees, court costs, and making an already difficult situation even harder.
If the property is approaching foreclosure, and the divorcing couple cannot agree, it could spell financial disaster. Often times, the sale of a home will not cover the cost of the mortgage and other various fees that have accumulated. Thus, if both spouses want to keep the house, and cannot reach agreement, both may be liable for a deficiency judgment.
The options for both spouses who do not want to keep the home are perhaps easiest in terms of divorce. If a couple’s home is facing foreclosure, and their marriage is ending, a situation where neither spouse wishes to remain in the house could potentially be beneficial for everyone. For instance, both spouses could rent the home to a tenant, and their rental payments could cover the mortgage payment, and potentially more. Moreover, the lender may be willing to accept the deed to the home in lieu of initiating foreclosure proceedings. This may ultimately save both spouses from being liable to a deficiency judgment. Finally, if the home is worth more than the mortgage, the couple’s final choice as a couple could be to sell the home and split any remaining proceeds.
The advice of a local divorce attorney is the best way to plan a divorce, particularly if property owned by the couple is subject to a mortgage or other debts. A lawyer can explain the nuances of your states laws, and help you and your spouse plan dissolving your marriage accordingly.