An unfortunate fact of life is that housing and financial problems can metastasize, destroying marriages and families. When this happens, despite the cloud of unhappiness that hovers over a couple’s life during these times, differences should be set aside when it comes to how to dispose of the family home.
What follows is a summary of issues to consider by couples wondering how to deal with the disposition of their home that is awash in “negative equity” – i.e. the remaining debt on the mortgage or mortgages exceed(s) the current fair market value of the home:
- The Oregon real estate market is very good right now; available inventory is low and buyer demand is high. There is no reason to believe this demand will dissipate over the coming summer months. For this reason alone, the property should be listed as soon as possible. However, there is another good reason, as well.
- If they qualify for the tax forgiveness law [i.e. they lived in the home two of the last five years and used the money to buy, build, or substantially improve it] then they should not incur any income tax, state or federal, on the 1099-C that will be issued for their bank’s cancellation of debt, if the sale is completed and closed in 2013; we don’t know if the law will be extended into 2104. [For a more complete discussion, go to my post here. PCQ]
- As long as husband and wife are in agreement on short selling the home, I have no problem with the divorce proceeding occurring at the same time as the home is being marketed for sale. In other words, absent other circumstances, there is no compelling reason to put one process first and the other second. Certainly, it is important to get the home sold as soon as possible, since we don’t know if the tax forgiveness law will be extended into 2014.
- In most cases, the husband and wife will both be on the deed and the loan. If so, they will both have to sign the short sale closing paperwork, and likely will be similarly impacted on their credit rating and IRS reporting. Thus, the only issue is that they cooperate in signing any and all documents reasonably required by the bank(s) to facilitate a closing of the sale.
- However, if the divorce is completed before the short sale closes, they may wish to consider some simple words in the final judgment or property settlement reciting the fact that they will cooperate with the lender, assuming they can do so without cost or liability to them. If there will be some cost or liability, e.g. the bank wants one or both of them to pay money or sign a promissory note for a portion of the deficiency, that will need to be addressed before the final judgment is issued.
- As a practical matter, in most cases that I have seen dealing with a primary residence and only one lender, there is generally not much risk of the bank asking for money from the borrowers-sellers, as a condition to their granting consent to the short sale. If there are two loans, the first lender usually pays a little money to the second lender for its consent, and the sale closes.
- However, a big problem can occur if husband and wife secured a loan and the lender required that they have mortgage insurance (“MI”), insuring against borrower default. If this is the case, MI frequently asks the borrower-seller for money, and can kill the short sale if the borrower-seller refuses.
The Take-Away. If a short sale is finalized before the divorce, some of the uncertainties will undoubtedly be moot by the time of the divorce judgment. Otherwise, if the divorce is going to be finalized before the disposition of the family home by short sale, the parties may want to address the risk of some financial exposure to the lender or MI carrier. And given the fact that both parties are usually equally disadvantaged by the short sale [assuming they are both on the mortgage], it behooves them both to set aside lingering animosities, and get the home sold before the end of 2013.