Divorce: No Home Equity and the Short Sale

Written on Monday August 27, 2018 by Cassie Jane

Mortgage and short sale of house

It’s no secret that divorce comes with a plethora of transitions and challenges. Emotions run high while both parties try to figure out how to restart their lives independent from one another. There are often times many assets the couple accrued over their marriage that have to be divided fairly. Usually, the largest asset that has to figure out is the family home.

Where to begin?

Because it’s worth the most (both financially and emotionally), the it’s hard to decide what to do with the family house. We encourage divorcing couples to put the emotions aside for a minute. Think about what is logical before moving forward. If one person really wants to keep the home, they need to ask themselves whether or not they can truly afford it. Also, do they really want to live there? It helps to put yourself in the shoes of living in the house and being single. If you need advice on selling versus keeping the house, see this article

In many cases, the couples decide that the best thing to do is to sell the house. However, sometimes there isn’t enough equity (value) left inside the house in order to sell. So that leaves a tough question: how do you sell if the house isn’t worth as much as the amount of the mortgage?

Short Sale & Home Equity: How it Works

If you’re unfamiliar with what a short sale is, don’t worry. We’ll walk you through everything. First, a short sale is when you sell your home for less than the amount due to the bank. For example, if you still owe $200,000 on your mortgage, but you’re only able to sell your home for $180,000, you’re selling short of the $20,000 difference.

In these cases, the lender is deciding that they prefer to take less money than you owe rather than going into foreclosure. However, lenders don’t usually jump into short sales quickly. They usually require the borrowers to prove hardship. Sometimes, providing your lender with a divorce decree will be sufficient to prove hardship. However, many lenders will require you to be behind on payments, proving you’re unable to keep up, before they’ll agree to it. You may want to consider a short sale if neither you nor your spouse are unable to keep up with payments and it looks like foreclosure is imminent.

Before moving forward officially, it’s a good idea to make sure both you and your ex agree to go through with a short sale. It’s important that everyone is on the same page, and that they will accept the negative consequences that come with selling short. 

What are the negative consequences of a short sale?

In a short sale, you’re essentially giving up your keys and your house without receiving a penny. It’s important to make sure the lender will not require you to pay back the amount you are “short” when you sell. And it’s also very important to check the tax implications.

In fact, depending on where your property is located, this can be a very important question to ask. Sometimes the difference between what you owe and what you sold the property for can be taxed as a “gain”. This is another reason to make sure both parties are in agreement that a short sale is the route they want to take.

One other negative consequence of the short sale strategy is that it will impact your credit score. Yes, it won’t affect your credit as severely as a foreclosure would. But it will make it more challenging to obtain loans in the future – especially loans with favorable interest rates.

Why would a short sale still be worth it then?

Though there are pros and cons with every situation and it’s up to you and your ex to decide what is right for both of you. Selling short to get out from a property that is underwater can be a very smart move. The sooner you can make this decision in the divorce process the better. Both parties on the mortgage can be held liable for the taxes. It’ll be the easiest for everyone if this financial burden is split immediately. Don’t wait for months to go by to figure it out.

Yes, credit scores will be impacted in a short sale. But they won’t be affected as much as if you went into foreclosure. If you truly cannot keep up with payments, selling short is a good call. It’s like jumping off a sinking ship right before it goes down. Sure, you’ll have to swim like crazy to get back to land, but at least you have a good chance of making it to safety!

There are also huge emotional benefits to unloading the burden of the house. You and your ex get to start with a clean slate and can begin to rebuild your lives. Though it’s not ideal, neither is your current situation. We hope this information has been helpful to you as you navigate this tough question! 

We should also note that if you’d like to sell your property quickly and painlessly, we’d be happy to give you a cash offer! Once you submit you information, we’ll reach out very soon to discuss how we might be able to help. Feel free to read more about selling your property to an investor right HERE.

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