Homes appreciate in value most of the time. So when two people get a divorce, they typically split the positive equity that's built up. However, approximately 13.2 percent of homeowners are underwater on their mortgages, which means they owe more than the home is worth. If you and your soon-to-be ex-spouse are stuck in this particular situation, here are two ways to handle this situation to avoid being stuck with that debt:
Zero Out the Equity
If one spouse decides to keep the home, your divorce attorney may recommend ignoring the negative equity in a home and deal with the property based on its face value when splitting the assets. The primary benefit is one spouse won't have to give up any assets to compensate the other spouse for assuming the home's negative equity.
At first glance, this may seem supremely unfair. However, real estate values fluctuate. Although the value of the home may be less than the mortgage currently, that doesn't mean it will always be that way. Eventually, the property's value may increase and zeroing out the equity will prevent one spouse from unfairly benefiting from the temporary dip.
Whether or not the judge will allow this type of transaction depends on a couple of issues though. First, some states require divorcing couples to split assets and liabilities as they currently exist on the books, so this option may not be available. Second, this only works if the spouse plans on keeping the home long term. If the person plans on selling soon after the divorce, the judge may require you to split the responsibility for the negative equity since there may not be enough time for the home to appreciate in value.
Sell the Property in a Short Sale
If you nor your spouse has the financial resources to continue paying the mortgage on the home, your other option is to get rid of it in a short sale. Essentially, this is a real estate transaction where you and the bank agree to sell the property for less than the amount owed. Although lenders aren't fond of this type of sale, it saves them the expense and hassle of foreclosing on the property and lets them get most of the debt paid off.
While this can help you unload the home fast, you must be careful when negotiating with the bank if you want to walk away debt free. Remember, the home will sell for less than the amount that's owed, and the bank could still hold you responsible for the balance. Be sure the bank agrees to forgive any shortfall as part of the short sale agreement to avoid being liable for any deficiency.
For more information about these or other options for dealing with an underwater home during a divorce, contact a law office like Bergermann Law Firm.