How does a spouse "buy out" of the marital home when you owe more than the house is worth (no equity)?

Question

Husband & I refinanced our home 1.5 yrs ago to pay off his college loans & our joint credit card debt. We qualified for a "110% loan," leaving us with no equity. Plan was to not sell for quite some time. However, we're now divorcing.

1st mortgage = $160k, 2nd mortgage = $50k ($210k total).
Home's current value is ~$170k. Husband accepts responsibility for debt from his college loans ($42k). He also agrees that I get $10k "credit" for original down payment which came out of my personal savings. I will probably stay in the home for a few years; it's not in our best interest to sell now given the $ situation & housing market. Based on my assumptions & calculations, to "buy him out" he actually owes me $72k. Correct? Lawyer recommends not refinancing & leaving husband's name on mortgages so he feels more pressure to pay, or me refinancing with parents cosigning to reduce payments but then husband has no financial responsilibity to mortgage company, only to me. Recommendations??

Answer 1

I too would follow the attorney's advice. It doesn't sound like anything else would be a win/win situation. The $72k sounds appropriate if you sold the house right now. But, I'm not an attorney.

Answer 2

Again, talk to your lawyer.
But I'd say since you owe more than you have in equity, you're really splitting debt, not an asset.
Nobody is "buying" anything from each other, you're each going to assume the debt to be paid to the bank after selling the house.
If you keep the house, same thing; it's not an asset, it's a liability.
You should sell it for sure.
Your lawyer telling you to do something to make your husband "feel more pressure to pay" is not fair:
You are the one who wants to keep the house, and if/when the price goes back up, YOU will be the one to benefit, not your husband, unless you're willing to split that with him in the future.
But that adds a whole new complexity to the equation; when do you split that profit?
Does he get to demand a sale to take that profit? If so, when?
You're just creating a larger mess by keeping the house.

Remember, your lawyer gets more money by being "on the job" longer.
It's in his/her best interest to create the biggest fight possible, because it will take much more attorney time & fees to fix.
I've seen this many, many times, so beware!

Answer 3

I strongly recommend either you sell the property, or refinance in your name only. I do not agree with your attorney's advise, to keep the husband on the loan "so he's pressured to make payments."

Here's how I'd do the calculations:
Current Market Value: $170k
Cost to sell (commission, closing costs, repairs, 2 months of vacancy, etc): 12% (or $20,400)
Net Receivable: $149,600

This should be the purchase price of this house, if one spouse is to buy it from the other.

This results in a net Loss from Sale: (amount owed minus receivable) $60,400.
Each person's loss: $30,200

Share in closing costs ($20,400): $10,200 each

Added adjustments: $42,000 + $10,000 = $52,000

After adjustments:
Husband's loss = $30,200 + $26,000 + $10,200 = $66,400
Wife's loss = $30,200 - $26,000 + $10,200 = $14,400

So ... here's the final analysis:
Wife refinances the house for $149,600. Obtains her own financing.
In order to close the escrow, the existing loan has to be paid off. Wife contributes $14,400 and husband contributes $66,400.

At the close of escrow, wife receives a settlement of $149,600 + $14,400 + $66,400 - $210,000 = $20,400 (assuming the financing costs are rolled into the new loan)

If there are any questions about it, please feel free to contact me at [e-mail]. I am an experienced real estate investor. Since I am not an advisor/professional, there won't be a charge. :^)

Answer 4

Follow your lawyers advice.