In a perfect world, you’d be able to time your divorce to get the most out of your real estate investment. In reality, that doesn’t always happen. The marital home is usually a couple’s most significant asset. When neither spouse is willing nor able to buy out the other’s equity interest, they must usually sell. This can cause problems in an unfavorable market.
Renting the Property
If you list your home for sale in a depressed market, you’ll either get no offers at all or you’ll receive a few that aren’t sufficient to cover closing costs, realtor’s fees, and proceeds that you can use toward a down payment on a new home. Some couples choose to ride out the market by renting their home for a period of time instead. If you can rent it for more than your mortgage payment, you and your ex can divide the difference each month. At a minimum, if you're able to rent it at a rate equal to your mortgage, you can keep your mortgage payments current until the market rebounds. You’d have to have a reasonably amicable relationship with your ex for this to work because you're still co-owners of the home, equally responsible for its upkeep and expenses that the rent payments don’t cover. Renters might also cause damage to your home. You'd then have to pay for repairs before you could list it for sale when the market comes back.
Continuing Joint Occupancy
You might decide to place a 'For Sale' sign in your yard and move on, with you and your spouse each relocating elsewhere while you wait for a buyer. However, you’d still be responsible for half the mortgage payment every month on top of what you’re paying for your new accommodations. If you can’t afford this, and if your divorce is very amicable, you might be able to peacefully co-exist in the home until it sells. If you can stake out portions of the house that are “his” and “hers” and stay out of each other’s way, this can be a short-term solution. As an added advantage, your realtor won’t have to show an empty, unwelcoming home to prospective buyers. Lived-in homes are usually more attractive, provided they’re neat.
If you and your spouse have sufficient other assets, it might be possible for one of you to buy out the other’s interest through an exchange. Normally in a buyout, one spouse refinances the existing mortgage for an amount sufficient to cover the first loan balance, plus the other spouse’s equity interest. However, if you don’t have enough equity, or if you have too much equity, lenders usually don’t like to refinance a balance that's more than 80 percent of the home’s appraised value. It's also possible that neither of you can qualify for an increased mortgage on your own. If you have other assets, one spouse can retain ownership and all the equity in the home and the other can take assets of value equal to that of their share of the equity. The spouse keeping the home would still have to refinance it to relieve the other of responsibility for the mortgage, but he wouldn’t have to contribute extra funds for a buyout.
If you just can't wait to sell the home and move on, but your home is underwater and you owe more than its appraised value, you might be able to arrange a short sale with your lender. In this situation, the mortgage company allows you to sell your home for less than the mortgage against it and usually forgive the balance. However, “forgives” is a misleading term because the short sale will turn up on your credit report. It’s usually not as bad as a foreclosure, but it will ding your credit for a while. The laws also vary among states with regard to short sales and, in some jurisdictions, you may still owe some money after a short sale. It's wise to review your local laws before pursuing this option.