One of the most complex and difficult aspects of a Houston divorce is property division. It is hard enough to figure out who gets the lamp, the couch, the car and the dog but it is even more challenging to determine what should happen to the house, or in some cases, homes. The difficulty doesn’t solely lie in the fact that the house is often times the largest asset in the marital estate or that one party or both parties are emotionally tied to the property. The biggest hurdle to disposing of one’s castle is the inability to sell real property (at least without taking a loss) in today’s uncertain housing market.
Buy Me Out!
I commonly hear clients tell me that their spouse can have the house so long as he or she “buys them out”. Here is the problem. How much does a person need to give you to buy you out of a house that is worth less than what you owe on it? The answer…zero, zilch, nothing, nada. When a house is worth less than what you owe on it there is no equity. Equity is what the house is worth (what you could sell it for) less what you own on it (the remainder of the note). When there is no equity there is no money to split, therefore, no buying out. So if the house isn’t worth anything in today’s market what can you do? A few things come to mind.
You can put the house on the market and hopefully get the most you can out of it. If sold at a loss, the parties are responsible for paying off the remainder of the note which is generally considered community debt. Now both parties have undoubtedly incurred the expense of moving out of the house and as a bonus, get to pay off a house they no longer own or live in. Not fun.
You Can Keep It, Just Take My Name Off!
Another option is allowing one spouse to keep the house as part of a settlement. Yes, the house may be worth something later but many people who find themselves in a divorce just want out and aren’t interested in housing market speculation. Allowing one party to keep the house has its own obstacles. You may ask: How do I get my name off of the house? Will it affect my credit if the spouse doesn’t pay the note on time? Can I buy another house with my name still on the first house?
Taking your name off of the house is done through refinancing or assumption. The spouse keeping possession of the marital residence can refinance the house into his or her own name or they can ask the lender to allow them to assume financial responsibility for the note. Both options are possible with the first being more likely, assuming the spouse has good credit and a job. Assuming a note is basically removing someone’s name from a note without a formal refinance. I find that most banks are unwilling to let a liable party go without a new contract and guarantees from the spouse keeping the house.
If a party cannot refinance or assume liability for the house they may consider executing a deed of trust to secure assumption and a deed without warranties. The first deed is executed by the person who keeps the house and is essentially allows the ousted party to reclaim the property in the event the bank initiates foreclosure proceeding on the other party. Your name will still be tied to the financial obligation on the house but you have recourse if your credit becomes threatened due to non-payment of the note by your ex-spouse. The ousted party will execute a deed without warranties to the party keeping the house thus giving up their interest in the real property. In short, the ousted party will not be on the deed to the property even though they remain on the note.
If the deeds are executed and recorded properly, the only issue left is whether or not the ousted party can buy another house while still technically owing on the first. That will be up to a finance company. Your debt to income ratio may be in trouble because with a new house note added to what you already owe the bank may see it as a risky loan and thus deny your loan application. Some companies may look at the divorce decree, the deeds, and certainly your income (some people can easily afford multiple home) to determine whether a loan is available to you.
In short, there is no easy way to divide a home in today’s market when it has no equity but you still have options.
Contact Shawn Rudisel today for a complimentary consultation to discuss your Houston divorce property division issue.
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