A house is often the most valuable asset a couple has in a divorce which can be a blessing or a curse. The best case scenario for couples is to sell a house or have one of the spouses refinance. There are other times when there are no good options when a couple cannot afford to sell the house.
Selling a house when it is “under water”, or the mortgage is more than what the house is worth, is a serious complication. Unless a couple is able to come to the closing with the money to pay the difference between the sale price and what is left to pay on the mortgage, what do they do?
- Short sale
A short sale is allowing the house to be sold with the mortgage lender agreeing to accept less than the full balance of the mortgage. A short sale can only be done with the blessing of the mortgage lender and not all mortgage lenders will go along with a short sale. Every mortgage lender is different. A short sale can have tax implications so it is important to talk with an accountant because the money the lender allows to not be repaid is income according to IRS Tax Code on January 1, 2017.
A short sale will show as a serious negative on a credit report for up to seven years.
- Become a landlord
Ex-spouses can agree to rent the property until there is more equity in the home. Renting the house requires the ex-spouses to work together jointly to make this arrangement work. Someone will have to be responsible for finding tenants and fixing issues inside the house, i.e. a water heater. The ex-spouses will have to figure out who pays for repairs. The city in which the house is located may have rental property codes that have to be followed if a property can be rented. Lastly, rent is income under IRS Tax Code.
This scenario can be complicated and will not work for ex-spouses who do not get along.
- Live in it together
This option is only for a very select and tiny group of couples who can live together peacefully under the same roof. While less than ideal, it can allow a couple to pay bills jointly and continue paying the mortgage until there is enough equity to sell the house. Special attention has to be given to who pays what bills, repairs and other expenses until the house sells.
If a short sale or renting is not possible, the house will likely be lost to foreclosure and it goes back to the bank. The person whose name is on the mortgage will have this severe negative on his or her credit report for up to seven years.