Home mortgage often complicates Divorce

Reprinted from The Morning Call:

Splitting Up

With home values sliding and financing tight, selling a home during a divorce is tricky.

August 26, 2011

 

By Eloise DeHaan • Special to The Morning Call

 

Besides being a difficult matter emotionally, divorce is also a business transaction, that of splitting the assets that have accumulated during a life together and arranging for a new life going forward. And within that process is a new difficulty: the family home, the biggest asset to be split in a divorce, is not worth what it was five years ago.

 

In many cases, the house is worth less on the market than what is owed on the mortgage and home equity loans.

 

 “Houses are underwater. Instead of allocating assets we allocate debt,” says Robert L. Sharpe Jr., an attorney in Lower Macungie Township.

 

More than 40 percent of her divorce clients have homes that carry more debt than can be raised in a sale, says Nancy Wallitsch, an attorney with Wallitsch and Iacobelli, LLP, of Allentown. It’s important, because the first decision that follows the filing of a divorce action is what happens to ownership of the house.

 

“Some people simply can’t get divorced right now,” Sharpe says. “No one wants to take a hit.”

 

Indeed, divorces have been falling. The divorce rate in Pennsylvania was 2.7 divorces per 1,000 in population in 2009, according to the Centers for Disease Control and Prevention, down from 2.9 per 1,000 in population two years earlier, just before the recession kicked into high gear.

 

For the Lehigh Valley’s population of nearly 650,000, the 2009 figure, the most recent available, works out to 1,800 divorces that year. Also in that year, 5,723 homes were sold in the Lehigh Valley, according to an Internet posting by the large local real estate agency, Prudential Patt, White Real Estate.

 

A decision must be made. One party can stay in the house, or both can move out. Ask, who can afford the house? The spouse who retains the property will need to be able to get a new mortgage loan, based on his or her income and assets.

 

It’s important that the deed and the mortgage be in one name only, the attorneys say. That way the party who is leaving has a credit record that is free of the debt. Additionally he or she can’t run up new debt using the house as collateral. And if there’s an accident, say a guest trips on the stairs and breaks an ankle, it’s clear who bears the liability.

 

There’s a bright spot. “If you are in a position to buy out the other spouse, you’re buying low,” Sharpe says, so the outlay is less than it would have been a few short years ago. But if both the husband and wife move out, putting the house on the market, today’s reality means a quick sale might not be forthcoming.

 

That’s when the basics of home selling come into play. “Proper pricing is always the key to any sale,” says Lori Campbell, an associate broker with the Coldwell Banker Heritage Real Estate office in Bethlehem Township.

 

Using today’s technology – a nice collection of photos on the Multiple Listing Service online, e-mail alerts, Facebook and Twitter – to give the greatest amount of exposure is another important factor, she says. And make sure the property is as pristine as possible. To generate interest, make sure that not only buyers, but other real estate agents, too, are familiar with the property’s strong points.

 

“Buyers will be attracted by condition and price and agents will be attracted by those items as well as commission offered, bonuses, and so on,” Campbell says. Should you let buyers know the house must be sold as part of a divorce settlement? Probably not. Of course, if only ladies’ clothes hang in the closet, or half the furniture is missing, buyers will probably catch on, Campbell says.

 

Separated husbands and wives usually interview prospective real estate agents separately, but agree on one agent to handle the sale, she adds. It’s important to hire an agent who has experience in negotiating and navigating today’s mortgage processes.

 

One of those processes is selling a house that’s under water; tough decisions have to be made. If the bank is willing – and more are these days – a short sale is an option. In a short sale, the home is sold for less than what is owed, the bank loses money, and the sellers get nothing except a bad mark on their credit history. But at least they don’t owe anything. And foreclosure – when the lender takes over ownership because mortgage payments have not been made – before, during or after a divorce can really complicate matters.

 

In July, one in every 928 homes in Lehigh and Northampton counties was in some stage of foreclosure, a rate that was higher than the state average, according to RealtyTrac, an Internet giant that tracks such things. And while foreclosure activity nationwide has been dropping, the six-month trend in Pennsylvania is rising, even though, as Wallitsch says, it’s not making news. “The press has gone away but the crisis remains.”

 

Even if there’s equity in the home, to be split according to the agreement made between warring parties, selling a home during a divorce is a challenge for the sellers. “Emotions are flying, they’re barricaded behind their lines and throwing bombs at each other, but they need to make a joint business decision,” Wallitsch says.

 

Many variables, such as proposed closing date, price, terms, what appliances will be included in the sale and so on, need to be decided. For example, if children are involved, a seller may make a concession on price or terms in exchange for a closing date that accommodates a school schedule.

 

Open communication is the key, Campbell says. “When I am involved in the sale of a property where the parties are getting divorced, I make it my policy to communicate openly with both parties via e-mail or phone,” she says. “If both parties feel they are being treated fairly and trust their agent, a successful sale should follow.”