My spouse and I own a home and it is “under water”. What does that mean and how will it impact a divorce?

house moving

A piece of property that is “under water” or “upside down” is another way of saying that the price of property has negative equity.  That means that if the owners of the property list it for sale today, based upon current market value, the property would have a negative profit.  In other words, the parties could sell it, but they would owe money on the property rather than making any sort of profit.

Given the trends in the housing and real estate markets in recent years, most properties are beginning to again increase in value.  However, over the past ten years, overall, the market has seen a significant drop in values of real property.  When parties took out Home Equity Lines of Credit (or “HELOC’s” as they are sometimes called) they may have sucked out more of the equity than they would be able to obtain if they sold the house.  This leaves divorcing parties in quite a predicament, because they don’t know what will happen to their home if they divorce.

The goal of any divorce is to divide up all marital property and all marital debt, and to dissolve the marriage.  When there is a piece of property that has a negative value it can be very difficult to try and figure out how to “divide” that debt.  First, if any party in a divorce wants to keep a piece of marital property and both parties are on the mortgage, the mortgage will need to be refinanced to remove the name of the person that is not going to keep the property.  Most Courts will require that the parties do this within a certain time frame, with some exceptions.  The parties might agree that Wife has 2 years to refinance Husband’s name off the mortgage, otherwise, the property will be listed for immediate sale.  The parties may agree to a short sale, where the parties sell the house for what they owe the bank and no more (or, in certain scenarios they may sell it for less than what they owe and get a release of any deficiency).  Sometimes the parties may be forced into foreclosure.  It completely depends upon the Judge, the amount that the property is worth versus what is owed, the parties’ resources, and more.  Usually the goal is to get someone’s name off of the property, whether it is through a sale or a refinance.

Some parties are afraid to try and get divorced because their property has negative equity.  The Courts and attorneys have gotten used to handling these situations because of market trends.  Parties do not necessarily need to wait until the home has value again to file for divorce.

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