When a divorced couple faces foreclosure, a downturn in the housing market can put an additional financial strain on an already difficult situation. A short sale, in which a mortgage lender voluntarily agrees to take a loss on the loan, allows a homeowner to sell for less than the amount owed on the home. However, an ex's high income may prevent short-sale approval or compel the lender to hold the former borrowers financially responsible after the sale.
Although the borrowers may get rid of their mortgage debt through a short sale, financial consequences remain for both borrowers, despite divorce. In some states and for certain loan types, lenders may pursue borrowers through a deficiency judgment -- the difference between the amount owed and the home's sale price -- after the sale. Lenders might also require borrowers with high incomes to sign a promissory note -- a promise to repay all or a portion of the debt after the sale -- as a condition of short-sale approval.
After the Divorce
In the event both spouses remain responsible for the mortgage after a divorce, the lender requires financial information and details about the circumstances which compel them to sell, known as the hardship package. Many lenders consider recent divorce a viable hardship and borrowers who are current on their payments may qualify if their hardship package indicates that they can't continue making payments and face imminent default. Borrowers who divorce but earn enough money to maintain the house payment may have difficulty gaining short-sale approval free of further financial obligation. A husband's own income, plus alimony or child support obligations to the wife, may impede short sale if they prove sufficient to pay the mortgage.
An ex-husband's high income doesn't affect a short-sale approval if the spouse remaining with the home has refinanced and taken full responsibility for the new loan. On the other hand, a divorce decree stating that the wife keeps the home and the husband must continue to pay for the house as part of the settlement, requires the ex-husband to participate in the short-sale process. The lender considers the exes ability to afford payments, including the wife's, when deciding whether to approve a short sale. A husband's income compared to his debts, or debt-to-income ratio, must meet or exceed the lender's benchmark DTI, which for some loans may be as high as 55 percent. Not all short sales have DTI requirements, however.
A lender may determine that borrowers don't qualify for a short sale because it is not in the lender's, or its investor's, best financial interests. Lenders usually opt for short sales when the sale results in a lower cost and higher bottom line to the lender than a foreclosure and sale by the bank would. After analyzing a borrower's income documents and financial hardship, a lender is more likely to reject the sale if it determines that it can recoup more money by pursuing one or both of the borrowers after foreclosure.
- Chicago Tribune: Short Sales and Deficiency Judgments: What You Need to Know
- Bills.com: How to Remove a Name From a Joint Mortgage
- Federal Housing Finance Agency: FHFA Announces New Standard Short Sale Guidelines for Fannie Mae and Freddie Mac; Programs Aligned to Expedite Assistance to Borrowers
- Freddie Mac: Short Sale
- Fox Business: Breaking Up the Mortgage After Divorce
- Fair Isaac Corporation. "Research Looks at How Mortgage Delinquencies Affect Scores." Accessed Aug. 9, 2020.
- National Association of Realtors. "About SFR." Accessed Aug. 9, 2020.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.