A recession divorce: No one wants the house
With the housing market still struggling, one of a couple's biggest assets can be a liability if they're breaking up. Should they stay together for the sake of the house?
MSN
By SmartMoney
A recession is a bad time to get divorced -- especially if your home has sunk in value along with the rest of the housing market.
Last year, the divorce rate in the U.S. fell 4% after rising 7% in 2007, according to a report released recently by the National Marriage Project. Although the news might cheer family advocates, it suggests something else to project director W. Bradford Wilcox: that couples with depreciated home values might be waiting to split until the market rebounds.
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For most people, a house and their 401k accounts are their biggest assets. Right now, home values are down substantially from 18 months ago. In fact, according to Moody's Economy.com, 31.8% of owners with a first mortgage are "underwater" -- that is, their homes are valued at less than what's owed on the mortgages. That means couples who decide to get divorced -- and not live separate but together under one roof, an approach many have resorted to -- are splitting liabilities instead of assets.
"It used to be that couples fought over the house because of continuity and stability for the children," says Fadi Baradihi, the president of the Institute for Divorce Financial Analysts. "That's not happening anymore. Now everybody wants to run from it."
But when a property has lost significant value, running isn't so easy.
When it comes to the dilemma of selling or keeping the family home, one issue is whether either spouse could actually qualify and refinance the home as a single, one-income household. With negative equity so prevalent today, it's virtually impossible to get refinancing, says Leslie Thompson, a certified financial planner and partner at Spectrum Management Group in Indianapolis.
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If the couple isn't selling the house, the spouse who is staying has to refinance the mortgage -- that's the only way the bank will let the other go, says Richard Iglar, an attorney with Skoloff & Wolfe, a Livingston, N.J., law firm that focuses on matrimonial and real-estate law.
Otherwise, the departing spouse is equally liable for the entire mortgage, and, if the spouse who is in the house misses a mortgage payment, the other is liable to pay but has no claim to any equity in the house. But when there's negative equity, it's pretty much impossible to refinance.
"It doesn't make sense for the bank to make the loan," Iglar says.
That doesn't leave a divorcing couple with many good options. Here are a few to consider:
Wait it out
In this scenario, the couple continue joint ownership with an agreement to defer the sale of the house. They can agree to sell the house in, say, four years or when their children finish high school in the hope that home values will rise, Iglar says. Under this arrangement, one spouse usually moves out.
Who should get the house?
One thing to watch out for: If both spouses are on the mortgage, the one who moves out probably won't be able to get another mortgage should he or she want to buy another home. "The bank doesn't want to loan him money because he owes money on the first mortgage. His assets are tied up," Iglar says.
The spouse who left could go into a rental, and when the couple ultimately sold the house, that spouse would get half the proceeds at the time of sale. If the other spouse had been making the mortgage payments, he or she should get credit for the amount of the principal paid down over the four years, Iglar says.
Rent out the house
"We see more people renting the house to buy themselves some time" until the market recovers, Baradihi says. In this arrangement, both spouses move out of the home and rent the house to someone else.
They're more likely to pay less for a rental than what they had been paying on the monthly mortgage.
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A big caveat here: This setup makes it difficult for either spouse to buy another house and move on.
It forces them to be in transition for a long time, "and they're still in a financial relationship with the ex-spouse," says Thompson, of Spectrum Management.
Consider a short sale
Often, it's just best to sell the house, accept the loss and move on, Thompson says. The couple could negotiate with their lender to pay the difference between the sale price and the amount they owed or a lesser amount -- in which case they would have to determine how the debt would be paid.
