The marital home or residence was once the greatest asset of the marital estate. In many cases, it has now become an albatross. Clients and potential clients are very concerned today, among other financial/economic issues, about the value of their homes in relation to the market and their mortgages. This is particularly true in areas such as Rochester and Rochester Hills where Chrysler purchased a large number of homes for executives and other employees whom are no longer living in the area and these very nice homes are sitting vacant on the market.
Many people considering divorce are concerned that, after they are divorced, they may not be able to sell the residence or, perhaps worse, may have to reside together after the divorce if they cannot sell the home. This is of a particular concern when the house is “underwater”, where the appraised value of the home is less than the balance of the mortgage (or mortgage and equity loan or second mortgage.) This is known as a deficiency; the difference between the value of the home and the balance of the mortgage and often the costs associated with attempting to collect the balance.
There are at least four basic solutions to this problem.
First, the parties can attempt to work together to solve these issues. Often one party is willing to stay in the home and “ride the market out.” This may require some concessions from the party that does not retain the marital home, however, if the parties can agree, this can save them from facing a certain instant deficiency where they will have to come up with money at closing from other sources of savings. In addition, characterization of payments between the parties as spousal or family support may allow the parties to take advantage of income tax differentials and overall save the parties some money in the form of taxes.
Second, the parties can sell the home at the best possible price and take money out of retirement funds to cover any deficiency. While this is not an optimal solution, it is often effective. The money can be drawn without penalty at the time of the divorce and brought to the table. This allows the parties to move on without one party bearing more risk and maintaining the mortgage payment alone.
Third, the parties may attempt to broker a short-sale of the property. In a short-sale the parties, the realtor and the bank representative work together to sell the property at the best possible price and obtain a release from the mortgage. This appears to be a good solution, however, I have heard that the length of time that it takes to complete these transactions can be significant and they appear to have a problem with falling through at the final moment.
Fourth, some clients allow the home to go into foreclosure. Unfortunately, some couples faced with divorce have homes where they cannot afford the monthly mortgage payment alone and the deficiency is so large that it does not make sense for either party to keep the home. In this situation, some clients have allowed the home to go into foreclosure. During the foreclosure period, the client usually is allowed to stay in the home even though she is not paying the mortgage. In this case, the client can save the money that would be used to pay the mortgage to apply to a new residence. Unfortunately, this leaves the couple both open to liability for the deficiency and the bank may sue either party in an attempt to recover the deficiency.
These are only four potential solutions. There are many possible ways of dealing with this issue and the divorce process can be very flexible if the parties are able to “get along” in order to move on with their lives. A solution can be fitted to every situation.