Understanding Equity in New Jersey
A Roof Over Your Head
The most valuable asset that most couples have is their home. During the last few years, the real estate market has suffered, resulting in a drastic decline in property values. In addition record levels of unemployment have left many people unable to make their monthly mortgage payments. As a result of this bad economy, many marital homes, which were once a couple’s greatest asset, are now their greatest liability. These circumstances are difficult for the most happily married couple; however, for couples considering separation or divorce, these circumstances can be devastating.
During a divorce or legal separation in NJ, if a home has equity, the home is either sold and the proceeds divided or one party receives the home and gives the other party cash or some other asset in exchange. Separating or divorcing couples whose homes are worth less than what is owed on the mortgage (this is referred to as having negative equity) have the difficult decision of how to proceed. Below, I have outlined some options that are considered when negotiating a divorce under these circumstances.
Parties can choose to sell the home. In this case, the parties will have to bring money to the closing table. This is an option if the parties have savings or retirement assets (often money can be taken from the retirement asset, without penalty under a “hardship exemption”). This option is unavailable however, if the parties do not have sufficient savings to draw upon to pay the lender at closing.
What Do I Do?
Another option is that the parties can attempt to sell the house at a short sale, meaning that the lender will agree to accept less than the amount that is owed on the loan at time of sale. This option often involves considerable negotiation and completion of documents with the lender. The process could take many months. In addition, lenders will not consider this option, unless the loan is already in default. At the end of the day, this option may also have tax consequences and has a negative impact on the parties’ credit.
Couples may also ask the lender to accept a deed in lieu of foreclosure. In this case, the homeowner simply signs over the deed to the lender and leaves the home. Again, this may raise tax consequences.
Another option is that one party can remain in the home and take over responsibility for the payment of the mortgage. In this situation, however, the other party will remain a responsible party in the eyes of the lender. Choosing this option will require the party who is leaving the home to agree to remain on the mortgage obligation for a longer duration than what is typical among divorcing couples, as the party remaining in the home, will likely be unable to refinance the home which has negative equity for some time.
Finally, some couples have no options available, except to allow the home to go into foreclosure. This means that the parties simply stop paying the monthly mortgage payment. Couples in this situation can choose to leave the home immediately, or remain in the home until they are forced out. The benefit of this option is that it allows one or both of the parties to remain in the home, with the payment of the mortgage or rent. This can buy a party with limited resources some time to get back on their feet after the divorce. Due to the volume of homes in foreclosure, the process often takes one year, if not longer. This option leaves the parties liable to the mortgage company for the amount owed on the loan. It will destroy both parties credit and will likely leave them unable to qualify to purchase another property for the foreseeable future.
All of the above requires careful consideration of what is equitable, as well as future credit problems and tax liabilities. A thoughtful New Jersey estate lawyer can guide you through the options and help you decide what is best for your family.