During a divorce, you are dealing with the stress of ending your marriage, deciding on child custody, and division of property. One major decision is deciding if one of you will buy out the other or if you need to sell your marital home and divide the profits.
Then you receive a notice of default or foreclosure in the mail. On top of everything else, now you must worry about your home’s equity in a foreclosure after divorce. Following a foreclosure, the equity pays fees and penalties first, and any remaining equity is yours.
What happens to equity after foreclosure following a divorce depends on your divorce settlement.
What Is Foreclosure?
Foreclosure is the legal process after a borrower defaults on their mortgage. The lender takes legal steps to take ownership of the property, then sells the home to recover the loan balance.
Federal law requires a lender to wait until a loan is more than 120 days past due before they begin foreclosure proceedings. Some situations, including violation of a due-on-sale clause, may allow the lender to begin foreclosure procedures earlier.
The majority of mortgages include a “due-on-sale clause.” The clause prevents mortgage holders from transferring a mortgage or property without the lender’s knowledge. The clause requires the borrower to pay the entire loan balance in full if a transfer occurs without the lender’s approval.
Even if the clause is part of your mortgage, you may side-step it following divorce. One spouse may assign the property or mortgage to their spouse following divorce without consent. The allowance is in the 1982 federal Garn-St. Germain Act.
The Act states that if one spouse keeps the marital home following a divorce, they may take sole responsibility for the mortgage payments. This takes place using a loan assumption. The loan transfers ownership while keeping all mortgage terms intact, including interest, terms, and balance due.
The spouse who assumes the loan takes full responsibility for the mortgage. They receive any equity if they sell the home. They are solely responsible if they default on the loan, and foreclosure will only impact their credit.
Deed vs. Mortgage Transfer
If you sign the title of your marital home over to your spouse but do not change the lender paperwork, you remain responsible for the mortgage. Your ex-spouse defaulting on the loan will impact your credit. You will also be subject to foreclosure.
Whether or not you receive any portion of the equity in the home will depend on the wording of your divorce judgment. If your ex-spouse is awarded the home free and clear, you will not receive any equity following a sale.
Keep Your Home Equity Safe in Divorce
When going through foreclosure and divorce, there are three main things to consider:
- Who is responsible for making mortgage payments?
- How is outstanding marital debt being paid?
- Which spouse keeps the home, or is it being sold?
Determining responsibility for the mortgage involves both the divorce settlement and whether one or both names are on the mortgage. Foreclosure after divorce may impact the credit of both spouses.
If one spouse takes possession of the home, fails to remove the other spouse’s name off the mortgage, then defaults on the loan, both parties will be subject to foreclosure proceedings.
Preserve Equity in a Foreclosure After Divorce
If you are questioning the ability to maintain equity in foreclosure after divorce, contact the Estavillo Law Group. We have more than 50 years of combined experience in real estate and foreclosure law.
Call us at (510) 982-3001 for a free 15-minute telephone consultation regarding your foreclosure situation.