Things to Know about Selling Your
Home in a Divorce
You and your spouse are getting a divorce. After looking at your finances, you’ve agreed that neither one of you can afford to keep the marital home. In a perfect world, putting the family home on the market during a divorce will go smoothly. You’ll agree on how to divide the proceeds, and you’ll have enough equity both to pay off the original loan and give each of you some start-up funds for your new life.
But things don’t always go as planned. You may be unable to agree on how to divide the assets. You may not have enough assets to pay off your mortgage loan. This article explains how the law views marital property when you can’t agree on how to divide the assets and what your opinions are if you can’t afford to sell the family home when you divorce.
Community Property States
There are only nine community property states in the U.S. — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, the law says that any property you or your spouse acquires during the marriage belongs equally to both spouses, even if it is only deeded to one person. Although you can transfer your spouse on to the deed of any property you purchased before you marriage, that property is not otherwise considered community property. Likewise, gifts and inheritances are also considered separate property under the law.
When you divorce in a community property state, the court will generally order couples to split the proceeds of a home sale 50/50 unless one of you owned the property prior to the marriage and continued to hold the property separately. Judges sometimes make an exception in cases where one spouse was a stay-at-home parent and may grant the non-earning spouse a slightly larger percentage of the marital property.
Generally speaking, though, community property states have less judicial discretion; the default ruling will be an equal split of all marital property.
Common Law Property States
Most states abide by the rule of common law when it comes to who owns property. That means the person whose name is on the title or the deed is the owner, and property couples acquire during the marriage, including their wages and retirement funds, is considered separate.
When a couple divorces, they are free to make any agreement they want about how to divide property. The spouse with greater earning power can willingly surrender the larger share of their property to the other spouse, they can agree to divide the assets equally, or they can each keep their separate property.
When couples can’t agree in a common law property state, the court will step in and make a ruling about how to divide the assets. The only exception would be if the couple had a prenuptial agreement. Thus, while it seems that the person with more separately held property would do better in a common law state, there is also more judicial discretion
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When to Consider a Short Sale
Sometimes the problem isn’t that spouses can’t agree on how to divide marital property. Instead, they are underwater on the mortgage and don’t have enough savings to pay off the mortgage loan. In this case, the best option couples have is often to do a short sale.
A short sale is when you list the house for less than what you still owe on the mortgage. Lenders will generally accept a short sale because defaulting on the mortgage long enough for the property to go into foreclosure often costs a lender more in the long run.
Several things can contribute to an “underwater mortgage,” but most occur when there is a slump in the housing market shortly after you purchase your home. The way mortgage loans are structured, you make payments mostly on the accrued interest at first; thus, in the first few years, you barely lower the principal. Any downward fluctuation in real estate prices may mean that your loan value will exceed fair market value.
Although an ordinary couple could wait out the market, divorcing spouses need to liquidate the property quickly, and a short sale is the best out of several undesirable options, including foreclosure and bankruptcy. However, you will need to qualify for the short sale by proving that you can’t afford to make the loan payments before most lenders will consider allowing you to go forward with this option.
You should also be aware that a short sale will affect your credit score, making some individuals ineligible to finance a new mortgage loan after the divorce. Divorcing couples who can agree to wait a few years before selling their home, or who can borrow enough money to pay the shortfall after an ordinary home sale, will be in a better position moving forward.
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