Since the 2008 mortgage crisis New Jersey home values have taken a substantial hit, losing approximately one-third of their value in some communities. Over the past couple of years values have been on the rebound. However, the pace has been very slow.
If you’re going through a divorce, your home has negative equity, you are behind in mortgage payments, and a foreclosure is on the horizon what are your options for the house, and what is your smartest move?
If You Want To Keep The House
If you want to keep the house one option is to seek a loan modification from your bank. In this scenario you will ask your lender to take the total amount of the late mortgage payment balance and roll it into your loan – basically extending the term of your loan. This may allow you to hold onto your house and wait for its value to rise over time. Another option, if the circumstances make financial sense and your spouse is on the loan with you is to attempt to assume the loan in your sole name. A third option which involves you keeping the house is to refinance the property to remove your spouse, roll the overdue mortgage payments into the refinance, and hopefully lower your interest rate and payments. Each of the above scenarios involve you carrying potentially heavy debt. As I stated in my previous blog post entitled Right To Stay in The House After Divorce In New Jersey( hyperlink) there are a number of questions that you should ask yourself to determine whether it makes financial sense to remain in your home (whether it has positive or negative equity). If, after answering the questions you decide that it makes financial sense to stay in your home, you can pursue a loan modification, a loan assumption (if your bank offers this option), or a refinance.
If You Decide To Leave The House
If you decide that you will be leaving the house, you have a few options on how to leave. You can opt for a short sale or you may attempt to transfer the house back to the bank in a process called a deed-in-lieu of foreclosure. Alternatively, if the bank is not receptive to a deed-in-lieu or foreclosure or a short sale, you may have no choice but to let the house go into foreclosure.
A short sale is a sale of your house to a buyer for less money than you owe the bank. Normally, when you sell your property the sale price is at least as high as the amount that you need to pay off any bank loan on the house. For example, if you owe your lender $275,000, you have to sell you house for a little more than $275,000 in order to pay your lender in full and pay your other closing costs. In a short sale you list the property for sale and take the purchase offers to the lender. If the offers are lower than the loan amount the lender may approve the sale and accept a loan payoff amount which is lower than the amount due on the loan. The bank is agreeing to short itself by waiving the payment of the full balance due on the loan. From the bank’s point of view accepting a partial payoff may be more economical feasible than paying the costs of foreclosure where they still have to sell the house probably at a substantial loss. The negative with a short sale is that you may end up with cancelled debt income.
Deed In Lieu of Foreclosure
A deed in lieu of foreclosure is exactly what its name implies. It is a transfer of the property via deed from you as the title owner to the bank. The bank may be open to accepting the deed because it relieves them of the time and expense of having to pursue a judicial foreclosure. The advantage to you is that you rid yourself of the property in one quick transfer, and usually the deed in lieu of foreclosure agreement specifies that the bank will waive its right to pursue you for any deficiency owed. The negative with signing the deed over to the bank is that even though the you can usually negotiate with the bank to avoid being pursued for a deficiency judgment, as is the case with a short sale, you will probably end up with cancelled debt income.
My practice is concentrated in the area of domestic relations (family law). I have been representing clients in divorce, child custody, child support, alimony and asset distribution cases for over 20 years. If you are considering a short sale or deed in lieu of foreclosure and you are also facing a divorce don’t hesitate to contact me at 201-731-3086, or via email using the contact form provided. The consultation is free.