Dealing With The Family Residence With No Equity
By Pamela Edwards-Swift, CFLS
A topic that seems to bear repeating is with regard to the family residence when the home is worth less than what is owed on the property. With the constant changes in our real estate market there tends to be a lot of confusion on how to handle the “under water” property. Do you allow the property to be foreclosed upon? Do you list the property for a short sale? Does one spouse take the property on without offset to the other spouse? The decision is important and there are many things to be considered in making that decision.
I have found that highly educated clients, successful family law attorneys, and even family law judges continue to hold beliefs regarding the law surrounding mortgages that are simply not true. As a result, litigants are suffering the consequences.
To illustrate, I have two examples of real life situations involving two different cases in my office just this week.
One couple came into my office stating they had an agreement concerning the division of the family residence. One spouse was going to be awarded the family residence and buy the other spouse out of the residence. They were in the middle of refinancing the property and both husband and wife were going to sign for the loan. The money for the buy out was coming from a different source. The parties believed that once the loan was completed, the "non-owner" spouse would sign off on the property and that by doing so, they were absolved of liability to the mortgage company. That simply is not true. If your name is on the loan, it will remain on the loan until the mortgage company takes you off the loan. That can only be accomplished in two ways, one way is to refinance the property in only one spouse’s name, the other is to refinance the property in the name of a third party (in other words, sell the home). Signing a quit claim deed or inter-spousal transfer deed does not remove your name on the mortgage. Even if your name is no longer on the property as an owner, you are still liable to the mortgage company for the loan and the loan information will remain on your credit report.
The second issue concerns what happens when a home is foreclosed upon. A very experienced family law attorney from Beverly Hills, and a family law judge were both under the impression that the best way to handle a home that is upside down (is worth less than what is owed on the property), is to let it go into foreclosure. They both believed that a short sale was a waste of time and would not make any difference to the couple. That is not necessarily true. The facts involved were that the couple had a first and a second loan on their property. Although the first loan was an original purchase loan (meaning they had not refinanced the property), the second mortgage was taken out at a later date. In a foreclosure, the lender would be able to seek recourse against the parties. Further, the consequences to credit are more severe with a foreclosure as opposed to a short sale. Before you make any decision regarding whether or not to allow real property to be foreclosed upon, make certain you understand your particular loan and what the consequences of a foreclosure will mean, as opposed to a short sale.