What Happens to a Mortgage During a Divorce?

Divorces are chaotic events, and things can get especially messy when an upside-down mortgage is thrown into the mix. Almost half of marriages in America end in divorce, and over 20% of mortgages exceed the home’s market value—so this is a common problem. When couples go their separate ways, they have options for handling the mortgage, with some options being simpler and more pleasant than others.

The Problem With Upside-Down Mortgages

When a couple divorces, assets are divided according to the provisions of the divorce agreement. If the home is worth more than its purchase price, the positive equity is included in the total value. However, when the home is worth less than the mortgage, it’s harder to address negative equity.

Negative Equity Credit

One way to deal with an upside-down mortgage during divorce is to give a credit to the spouse remaining in the marital home. The decline in value is made up by giving that person a bigger share of other assets. While this solution may seem sensible, it leaves the possibility of an uneven asset distribution. Homes typically regain value over time, and the person getting the credit may double their money if they sell at that time.

Zero Out the Debt

In some instances, rather than giving a spouse a negative equity credit, the debt will be “zeroed out” instead. Here, the negative equity isn’t considered during asset division, and the person keeping the home gets it at face value. This option is better if a spouse keeps the home as an investment, but it’s not always possible. Some states require an equal division of all liabilities and assets, including negative equity.

Short Sale

If neither person can afford to keep the home, a less-desirable option is to sell at a loss. Referred to as a short sale, it’s only possible if the owner can’t keep up with the mortgage and they get approval from the holding lender. A short sale may make it harder for a person to get a loan at a favorable rate in the future.

Divorces are complicated, and things can be made worse when mortgages are considered. For more information on mortgages and other lending products, visit Dustin Dimisa online.