When a house has positive equity, meaning that the house is worth more than the balance on the mortgage, it can be split in a divorce by selling it or refinancing it. However, those options are not as readily available when a divorcing couple's home has negative equity, meaning that they owe more on the home than it is worth in the current market. In Arizona, as in other states, divorcing couples generally have to choose between a handful of less-than-ideal options to address their home's negative equity.
Deciding How to Split the House and Debts
Arizona couples can split their marital property by reaching a settlement agreement in which they both agree on who gets what assets and debts. For example, the spouses can agree that one gets the home, mortgage and the family savings account while the other keeps the car, car loan and the retirement accounts. This allows the spouses to divide their assets and debts, including their negative-equity home, in a way that is most appropriate for their circumstances. Without a settlement agreement, an Arizona court must decide these issues for the couple -- and the result may not be exactly what either side wants. Arizona is a community property state, which means property and debts acquired during the marriage is generally split equally between the spouses. If the mortgage was obtained during the marriage, for example, the court can split the debt responsibility equally between the spouses.
Loan Assumption Programs
Typically, it is not possible to refinance the home's mortgage when it has negative equity. Thus, divorcing couples who might otherwise be able to refinance the mortgage to remove one spouse's name from the mortgage may pursue other options if their home has negative equity. One option available to some Arizona couples is a loan assumption program offered through some mortgage lenders. Such programs allow qualifying couples to remove one spouse's name from the mortgage without refinancing, leaving the other spouse responsible to pay the mortgage. However, the process takes at least 45 days in most cases -- and banks are not required to approve such loan assumptions.
Keeping the Mortgage
Even if a loan assumption is not available, divorcing Arizona spouses can agree to let one keep the house and keep paying for it, while both spouses' names remain on the mortgage. In such cases, one spouse gets ownership rights to the house and promises to keep making the mortgage payments. The other spouse is still liable for the mortgage loan, however, even if the divorce decree says that she is no longer responsible for that debt. The divorce decree or settlement agreement can give the spouse who gives up the house the right to sue the other spouse if he stops making the mortgage payments. But if he has no money to pay, the suing other spouse may find herself making the payments after all.
Sales and Foreclosure
Arizona spouses who do not want to keep a house can dispose of it by selling the home. But when a house has negative equity, the spouses may have to bring money to the closing table to pay the difference between the selling price and the outstanding mortgage. Divorcing spouses can split the cost of the sale if they have the financial ability to gather the required cash. If not, they can pursue a short sale in which the bank agrees to take less than what is owed on the mortgage or a foreclosure in which the bank sells the house to satisfy the loan.