Selling or Refinancing Your Marital Home During Divorce

This is the second contribution from local mortgage professional and licensed realtor Natalie DeLeo.  In this guest post, Natalie points out three things to consider when you are selling or refinancing your marital home in the divorce context.

1.  How do the terms "upside down" or "underwater" play into your decisions relative to your marital home?

Lower property values can affect your decision on what to do about your martial home.  For many people, the marital home is the largest asset they own.  Most couples cannot afford to own and operate two households: the soon-to-be former marital home, plus another home that one spouse moves into during the separation process that is divorce.

If the value of your marital home is less than the mortgage that is owed on it, selling the home will, in many circumstances, take much longer than a standard sale.  This is because you are in a “short sale” position.  Sometimes, short sales can take up to one year to obtain the necessary approvals from the mortgage lender; a second mortgage further complicates [and delays] the process.  

You could be in the marital home longer than you think.  Therefore, it is imperative that you plan to maintain the marital home as long as necessary to preserve the value.  If you find yourself in this situation, you need to hire a realtor that is a short sale real estate expert to broker your sale. 

If you or your soon-to-be-ex-spouse are not selling the home, then how do you must determine the equity or value of the home in this down market.  With home values bottoming out, there is less equity to distribute between the spouses. Sometimes debt is apportioned rather than equity being divided.

Some couples have considered maintaining a joint ownership of the home post-divorce [i.e. ownership as tenants in common, without rights of survivorship].  Their hope is that the real estate market will significantly rebound someday and both spouses can share in the net proceeds from the sale of the former marital home.  Check with your divorce lawyer about protecting your interest should you both decide to retain the marital home.

The mortgage economic crisis also has made it more difficult to refinance a mortgage to make payments more affordable for the spouse retaining a marital home. There are only two ways to remove a spouse from the liability of the martial home.

• Sell the home if it is not upside down.
• Refinance the home into the spouse’s name that is retaining the home.

Most homes in an "underwater" or "upside down" position will not have an available refinance option.  Contact a mortgage professional to find out about all the refinance plans to determine whether you qualify for any.  When doing so, be prepared to disclose whether you will be receiving [or paying alimony] or whether you can take advantage of a co-signor to get the deal done.

2.  What to consider when selling the marital home.

If you have determined that your home is not upside down and there is equity then you will have to have a licensed real estate appraiser determine the current value of home. There are many different formulas to determine the value of your home.  Ask your divorce lawyer for an explanation and a referral to get your home appraised.  

Each appraiser has their own opinion of what your home is worth; these opinions could be quite disparate. Your attorney will guide you through the process of how the home will be sold and assets distributed. Your realtor can help market the home so that you can get the best price for the current market.  

Your divorce attorney will have input about how to determine the value of the marital real estate; how the property will be marketed; and the timeline of a potential sale.  The goal in each case is to solicit a viable offer and to process the offer so that the home can be sold and closed in a manner that makes sense within the divorce framework.  

3.  Potential Problems when refinancing your Marital Home.

In the divorce context, the biggest problems arise when one spouse receives the home and agrees to refinance to remove the other spouse's name from the mortgage note.  In these tough economic times, couples are faced with: the lower average home values and tightened guidelines to qualify for a refinance transaction.  Sometimes, no matter how hard a spouse tries to refinance the home, they find they simply cannot close the deal.  

The spouse vacating the marital home is often required to execute a quit claim deed in favor of the spouse who receives the home.  Keep in mind when executing a deed that transfers 100% of your interest that it may be impossible for your former spouse to refinance.  

Or worse, we have seen where the spouse who remains in the home stops paying the mortgage and the home goes into foreclosure, with the missed payments and foreclosure proceedings appearing on the innocent spouse's credit report. Keep this in mind when making decisions relative to the marital home in your divorce proceeding.

If possible, get the issues worked out before the divorce is complete.  At least know that the spouse who is trying to refinance is a qualified candidate for the mortgage and has secured pre-approved before the judgment of divorce is executed.  Your divorce lawyer can put stipulations that the closing and disbursement can take place within so many [weeks or months] of the entry of your judgment of divorce.

The key is to prepare and think through all the options first, then direct your attorney to go out and negotiate your interests. Understanding and working through your particular situation and creating a plan with your attorney and his experts will give you peace of mind. 

Call Natalie DeLeo, Mortgage Consultant-on “The Cauley Team” NMLS LO# 138228 Mortgage Resource Plus 111 S. Old Woodward Suite 205 Birmingham MI 48009Office: 248-642-4600 Ext. 110. or Email Natalie@mrploan.com

www.clarkstonlegal.com

info@clarkstonlegal.com

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Posted in: attorney,divorce,lawyer,mortgage,real estate,real estate appraiser,short sale,tenants in common,underwater,upside down

Walking Away From Mortgage(s) Can Hurt You in the Long-Run

This is the original post and content of the Wink & Wink bankruptcy law firm of Denver, Colorado.  The topic is timely here in Michigan as many homeowners and divorcing couples, struggle to keep their homes.

Strategic Default. You Walk Away. “Should you walk away from your underwater mortgage?”

These phrases have been reaching fever pitch in the news media lately because of the continuing economic crisis and its huge toll on house values nationwide. The gist of the idea is that if your house is underwater, chances of you ever regaining the equity you have lost are slim to none. However, the media seems to be silent with regard to the risk of deficiency judgment, which often lurks out there like a predator waiting to attack!

The thought of continuing to pay the debt on your mortgage, knowing that your house is now worth much less than the amount you will be struggling to pay for the next few decades, drives people to look for a way out. This is the reason “strategic default”, which occurs when people stop paying the mortgage, even though they can technically afford to keep paying. Because the housing market is in the dumps and appears unlikely to bounce back anytime soon, ‘strategic default’ is becoming more and more common. So common, in fact, that it has been linked to the recent uptick in consumer spending.

The decision to walk away is definitely a way out from underneath that mortgage. But it does not come without a cost. This is because when you walk away, you aren’t simply leaving the debt behind. Oh, No. In most cases the debt is likely still following you, stalking you. Waiting to pounce. Walking away from your mortgage has consequences in most states, such as Colorado, and they go by the name of a deficiency judgment.

What Is A Deficiency Judgment?

When you take out a mortgage, or two, you are liable on the note or deed for that debt in the amount your contract states. When you stop paying your mortgage (either strategically or because you can no longer keep up with the payments) the end result in most cases is a foreclosure sale of the property. At that foreclosure sale, the property is sold, usually at a loss.

If the property is sold for less than you agreed to pay on the mortgage, you are still liable for the difference—the deficiency—between what you agreed to pay by contract and what the lender received through the foreclosure sale. So, if your mortgage is for $300,000 and the property sells at foreclosure for $250,000, you are still liable for the $50,000 your lender is still owed under your mortgage contract.

When you have two mortgages, a first and a second, what often happens is that the first lender often “bids the note” at the foreclosure sale, which means they purchase the property for the same amount as the note. This means there is no deficiency as to the first mortgage. However, it also leaves the second mortgage lender unfulfilled, and holding a claim against you for the entire amount of the second mortgage. (Don’t forget that all these amounts generally increase as a result of the fees and charges that get tacked on as a result of the foreclosure process. They never miss an opportunity to lop on some fees!)

A deficiency judgment is what happens when one of the lenders to which you owe a deficiency decides to sue you to collect on that amount. After the lawsuit, the amount gets converted into a judgment against you, a deficiency judgment. And in Colorado, where I practice bankruptcy law, the holder of a deficiency judgment can garnish your wages – 25% of your wages, to be exact. That is not a risk to be taken lightly.

How Likely Is A Deficiency Judgment?

You may be thinking “but I haven’t heard of anyone getting sued for a deficiency judgment.” And at this point in time, this is mostly true. But this is changing, see “Lenders Pursue Mortgage Payoffs Long After Owners Default”.  The predators (eh..I mean creditors) are getting hungry!

What is very likely to happen with the huge amounts of deficiency claims lenders are sitting, and that will continue to pile up as the foreclosure rates soar (yes, foreclosures are still spiking, we are far from out of the woods yet) is that lenders will begin to package these debts and sell them to third-party collection agencies, just like the credit card companies. When that starts happening, everyone who though they got out Scott-Free will have to face a painful reality. And they have plenty of time to wait to nail you, too.

In Colorado, they have Six years to wait before they sue you. Six years to sit back and wait to get there ducks in a row, maybe even wait for you to start earning more money, and then Whammo! You’re served a Summons to appear in court and you end up with your wages garnished or your bank account seized to satisfy the judgment.

Bankruptcy Can Shut the Door on a Deficiency Judgment

Bankruptcy generally removes your liability to repay the note on your home. So, whether you file for bankruptcy before or after foreclosure, the lender cannot pursue a deficiency judgment against you. If you file after the deficiency judgment is secured, the bankruptcy can still wipe out your liability for the judgment. It can even stop the garnishment if the lender has proceeded to that level.

All of this means that you should consult a bankruptcy attorney if you are considering defaulting on your mortgage.

For most other people, stopping mortgage payments on an underwater home is not a choice. It is something that the current economic situation has forced them into, and the idea of bankruptcy is likely part of the mix, along with rising credit card debt and stress levels.

However, for the true “Strategic Default”, where the decision to stop paying the mortgage is made even though the money to pay the mortgage is there, bankruptcy is usually the last thing on the radar. Most in this position look at the default as a business decision. They made an investment, it went belly-up, and they are cutting their losses. However, even “strategic” defaulters should take the time to understand their rights.

Bankruptcy can not only shut the door on a possible deficiency judgment, enabling you to move forward without worrying about what lurks behind, it can help you rebuild your credit faster. Think about it – if you walk away from the mortgage without filing for bankruptcy your credit takes a hit (foreclosures stay on your credit report for 7 years) AND you still may be liable for the deficiency, just when you are getting back on your feet and have regained your credit score. If you file for bankruptcy, you get rid of any chance of a deficiency judgment, wipe out any other dischargeable debt you’re struggling with, and start rebuilding your credit from day one.

Additionally, if you plan it correctly you can live in your house rent free until the foreclosure, which in Colorado usually means 8-12 months.

The bottom line is to be prepared, have a plan and explore your options. Walking away without knowing the risks exposes you to what I like to call the stalking predatory of the deficiency judgment. It’s only a matter of time before these debts start being sold to collection agencies, and with those creditors – you need to watch your back!

info@clarkstonlegal.com
http://www.clarkstonlegal.com/

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Posted in: bankruptcy,Bloomberg,creditors,deficiency judgment,mortgage,short sale,strategic default