GUEST BLOG: “Understanding Your Options – A Guide to Divorce, Real Estate & Short Sales”
As a Real Estate Broker, I frequently work with couples who are facing, or have previously gone through, a separation and/or divorce. When simultaneously handling a divorce and real estate transaction, the desire to “get it over quickly” often leads to bad decisions with long term legal, financial, and emotional consequences.
For example, take this scenario from our client files…
A Cautionary Tale
Five years ago, a husband and wife decided to get a divorce. The husband adamantly wanted to keep the marital home. The wife, simply wanting the divorce behind her as quickly as possible so that she could move on with her life, agreed to walk away from the marital home.
The separation agreement stated that the husband would be responsible for all expenses related to the home, including mortgage payments, insurance, repairs, etc. Additionally, the husband would be obligated to refinance the mortgage into his name only within the next 12 months. Per the separation agreement, the wife had no financial responsibilities regarding the marital home.
All parties signed the separation agreement. BIG MISTAKE!
After 12 months, the divorce was final and the ex-wife, having excellent credit and income, was ready to buy another home of her own. Before visiting potential properties, she contacted a mortgage loan officer to get pre-qualified for a loan.
The loan officer informed her that she did not qualify for a new loan due to her obligation on the mortgage for her former marital home. She was shocked to discover that the separation agreement did not relieve her of financial responsibilities regarding the marital home, as she had been lead to believe.
Since the separation agreement stated that the ex-husband had to refinance, she figured she was off the hook. Unfortunately, the ex-husband was not qualified to buy a car, much less carry a mortgage.
The distraught ex-wife then spent 5 years in court, and $55,000 in legal fees, seeking Court action to force him to sell the home so she could move on with her life. He stopped making payments and the home went into foreclosure, having long term effects on her credit.
In the above case, this nightmare could have been avoided if the following had occurred prior to the separation agreement being signed:
- Husband being given no more than 15 days to deliver a pre-qualification letter from a mortgage banker, stating that income and credit documents had been reviewed, and he was qualified to refinance.
- If husband was unable to provide proof of qualifications, the home would be placed on the market within 30 days.
- Husband agreeing to make the home available for showings.
- Husband agreeing to sign offers on the home that meet agreed upon criteria.
Another complication that commonly arises in real estate transactions incident to separation and divorce is that the owners owe more on the mortgage than the house is worth. In this case, the divorcing couple typically has 2 options:
- OPTION #1: Write a check for the difference between what the house sells for and the outstanding mortgage balance. Most people going through a divorce cannot afford to do this, on top of paying legal fees, additional household expenses, etc.
- OPTION #2: Pursue a short sale.
Short Sales: Understanding Your Options
Short sales are an excellent tool if your home is “underwater” – meaning it cannot be sold for enough to satisfy the total of the mortgage balance plus fees related to selling, such as real estate commissions and closing costs. Short sales are a misunderstood option surrounded by misinformation and mythology. Below are the answers to some frequently asked questions about short sales and distressed properties.*
Do I have to pay back the balance to the lender?
There are a few factors that determine if you are required to pay shortfalls to the lender:
- If the mortgage is a CDA loan, you were given a $5,000.00 grant. The grant will have to be paid back. Lenders normally offer a low interest rate promissory note for you to pay back the grant.
- If there is no hardship, you may have to pay back a portion of the shortfall. Lenders normally offer a low rate promissory note in these cases. For example, a borrower has a home but desires a larger one. The borrower buys a larger home and is qualified to carry the mortgages on both the homes. Once the borrower has moved into the larger home, he or she sells the previous home as a short sale. In this case, there is no hardship, since the borrower can afford both homes. Typically, there will be an agreed upon amount that can be paid back at a low interest rate.
- The majority of the time there is no pay back on FHA, VA Fannie Mae or Freddie Mac mortgage loans.
- If the mortgage is not FHA, VA, CDA, USDA, Fannie Mae or Freddie Mac, the noteholder is free to make their rules regarding pay back.
I make my payments to Wells Fargo. Does this mean Wells Fargo owns my loan?
Even though payments are made to Wells Fargo, this institution is simply collecting payments for the owner or investor of the loan. Most loans are owned by FHA, VA, Fannie Mae or Freddie Mac.
Is my credit ruined with a short sale?
If other accounts such as car payments, credit cards and student loans are kept current, borrowers are often surprised at how quickly their credit score rebounds. Normally, expect about 18-24 months for credit scores to return to pre-short sale status.
How quickly can I purchase another home after a short sale?
The answer to this question varies based upon circumstance and loan type. Here are some of the circumstances:
- An active duty VA eligible borrower may buy immediately after a short sale if the short sale is due to a permanent change of station. This means military personnel must have orders to permanently transfer out of the area. This is only if there are no late mortgage payments in the most recent 12 months.
- An FHA borrower may purchase immediately if the short sale is due to needing a larger home due to change in family size, and there are no late mortgage payments in the most recent 12 months.
- An FHA borrower may purchase immediately if the short sale is due to having to move to a new area due to job relocation, and there have been no late mortgage payments in the most recent 12 months.
- If the loan involved is a short sale and the above guidelines are not met, a borrower may obtain a new FHA loan in 3 years or a Fannie Mae or Freddie Mac loan in 4 years.
If I declare bankruptcy and include my mortgage, I am forgiven for the loan and can stay in the home. Is this true?
NO! The lender will eventually foreclose.
Are short sales better than foreclosures?
A foreclosure has a harder impact on credit. In the majority of cases, the deficiency balance of a short sale is cancelled. It is possible for a lender to seek monetary judgements after a foreclosure. Additionally, a foreclosure may take several years to be resolved. The clock does not start ticking for being able to purchase again until the foreclosure is fully completed.
What is the waiting period after a foreclosure?
A borrower may obtain an FHA or VA loan three years after a foreclosure is fully resolved. It is 7 years to obtain a Fannie Mae or Freddie Mac loan after foreclosure full resolution. It is not unusual to see a foreclosure take between 5- 7 years from the date of the first missed mortgage payment to be resolved.
What is a deed-in-lieu of foreclosure?
Rather than having the lender foreclose, a homeowner contacts the lender. The lender will agree to basically work with the homeowner to have the deed transferred back to the lender.
Am I taxed on the loss taken by the lender?
There is a formula used to determine if you have significant enough assets to be taxed on the lender loss. People are often pleasantly surprised to discover that there are no tax consequences. Before starting a short sale, you will want to know what you are getting into regarding future taxation. A call with a qualified CPA is strongly recommended.
*NOTE: The circumstances of each short sale and each homeowner vary. If you are contemplating a short sale, it is of the utmost importance that you do your homework and seek advice from qualified professionals with a successful short sale record, such as a Real Estate Agent, CPA, and/or an Attorney, to discuss the unique details of your situation.
Disclaimer: The information in this blog post is provided for general educational & informational purposes only. It is not intended to convey legal advice or serve as a substitute for legal counsel on any subject matter.
ABOUT THE AUTHOR:
Jackie is the owner & Broker of Jackie Daley Realty located in Columbia, MD. Jackie is a Certified Distressed Property Expert and is proud of her highly successful short sale record. Jackie also holds certifications in Divorce Real Estate, Workforce Housing and FHLMC Credit Smart. She believes in being the best that she can to serve her clients.
If you believe that you are facing a potential short sale, contact Jackie Daley Realty at (443) 622-3022 to schedule an appointment to discuss your unique situation.