How to Handle Real Estate During A Divorce
In a divorce, the parties will have to figure out how to equitably divide the marital real property. There are four basic ways to handle real estate in a divorce: (1) one party can buy out the other; (2) the parties can agree to sell the property to a third party and divide the proceeds; (3) the parties can continue to own the property together even after they divorce, or (4) if the parties cannot agree, the court can order the property to be sold.
There are several factors to consider when deciding whether one party should buy out the other. The first factor, if there is a mortgage on the property, is whether both parties are obligated on the underlying promissory note. It is important to recognize that there is a difference between the deed, the mortgage, and the promissory note. The deed says who owns the property. The note says who is obligated to pay the mortgage loan back. The mortgage creates a lien on the property to secure the note.
In all likelihood both parties will have signed the mortgage, especially if the property was their homestead because both spouses are required to sign to make the mortgage enforceable. However, it is possible that only one party signed the note and therefore that only one party is obligated to pay the money back. Whoever signed the note will continue to be obligated to pay on the note even if they sell the property to the other spouse, unless the receiving spouse either refinances the property or is able to convince the lender to release the transferring spouse.
This is an important consideration. If only one spouse is obligated on the note, the easiest thing to do is to have that spouse buy out the other. If both spouses are on the note, then you should make sure that the receiving spouse would qualify to refinance the mortgage to remove the transferring spouse from the underlying note. Otherwise the underlying note will continue to be a burden to the transferring spouse.
Sometimes one spouse will agree to let the other buy them out even if they won’t be able to refinance. In this case, the receiving spouse agrees to defend, indemnify and hold the transferring spouse harmless in the event of default under the note. This approach is not recommended as the transferring spouse has no control over and often no information about the receiving spouse’s payment history. If the receiving spouse fails to pay the note and mortgage, then the transferring spouse may find himself or herself having to defend against a foreclosure. Further, not being released from the note could prohibit that spouse from qualifying to purchase another property as their debt to income ration may be too high. Additionally, the promise to indemnify is only as good as the assets of the party making the promise. If there is no money to indemnify with, the promise is virtually worthless
If both spouses are on the note and neither spouse will quality to refinance, then you should consider selling the property to a third party. The other reason you might want to consider this option is if the parties cannot agree on the fair market value for the property. Rather than agreeing to a price amongst the parties, you agree on a real estate agent and let the market determine the price.
Sometimes parties agree to own property jointly because they feel the property will increase in value in the relatively near future. However, this will change the nature of the title of the property. As a married couple, title is held as tenants by the entirety. This means that a judgment creditor of your spouse could not force the sale of the property to pay the judgment. After divorce, you will hold title as joint tenants or tenants in common and a judgment creditor could force the sale of the property to pay an outstanding judgment.
Finally, if you are unable to agree on any of these options, you can include a partition action in your divorce petition. A partition action asks the court to require the parties to sell the property to a third party. Upon the sale, the note and mortgage will be satisfied and neither spouse will continue to be liable for the underlying debt.
Of course, if there is no equity in the property and it is upside down or underwater, then there will not be enough money to satisfy the debt and there be no equity to divide. Rather, you will need to allocate the liability remaining after the sale. It may be possible to reduce or eliminate this liability if you are able to negotiate a short sale where the lender releases both spouses from any deficiency.
There may be variations of these basic approaches that you can tailor to your specific situations. However, you need to be aware of the risks of each approach so you can make an informed decision, since whatever decision you make could affect your future for a long time.