A few years ago when the real estate market was booming, divorcing spouses had little issue refinancing with cash out to buy out the other or selling the marital home and dividing a tidy profit. Times have changed, and today, the issue is often what to do with a sinking ship. The Union Leader has published several articles lately about short sales and foreclosures, and the differences between the two.
First, there is a distinction between a homeowner being short and a short sale. A homeowner is short when he owes more on his mortgage to the bank than a sale can procure. A lender must agree to the sale of a property at a price that is less than what is owed. A short sale occurs when the closing of the property has happened.
A foreclosure, on the other hand, is the process where the bank takes your home when you have not been able to keep up with the mortgage payments. Foreclosure has a dramatic and lasting effect on credit scores, dropping scores by as much as 300 points.
If you are in the process of divorce, and your home has little to no equity, there are certain issues that you and your attorney need to keep in mind. If both spouses are borrowers for the mortgage, how will one spouse refinance to remove the other spouses name from the mortgage? Lenders are reasonably cautious about lending over 80% of the value of a home. If the home cannot be refinanced, and will be placed on the market for sale, what will happen if the home is short? Will the spouses need to come up with the money at the time of the sale, or will they negotiate a short sale with the lender? A carefully drafted proposed order or agreement will make sure that you are protected in the event of each possibility.