Selling a Divorce Home With an Underwater Mortgage or Little Equity in New Jersey

You can sell a home in a divorce even when you owe close to what it's worth, or more, but you need the real numbers before anyone signs a listing agreement. The options usually come down to selling and covering the gap, one of you keeping the home, or waiting, and the right one depends on your net proceeds, your lender and your settlement.

I'm Dennis Mark Interdonato with The Dennis Mark Group at Keller Williams Realty Ocean Living, and I'm a Master CDRE®. When a couple in Monmouth or Ocean County tells me "there's nothing left in the house," the first thing I do is check. Sometimes they're right. Sometimes there's more there than they think. Either way, both of you deserve the same number, at the same time. That's how I run every divorce home sale.

How do you know if you have little or no equity?

Equity is what's left after the sale pays everything it has to pay. That's not the same as the price minus the mortgage balance. Start with four numbers:

1. What the home will sell for. Not the tax assessment and not an online estimate. A market value built from recent closed sales near you, adjusted for condition. The home valuation tool is a good first look.
2. Every loan against it. The first mortgage plus any home equity loan or line of credit. Ask each lender for a payoff figure instead of going by the balance on your monthly statement.
3. The cost of selling. The fee in your listing agreement, your attorney, any repairs or credits, and New Jersey's realty transfer fee, which the seller pays when the deed is recorded.
4. Anything else due at closing, like unpaid property taxes, water and sewer bills or liens.

If the first number is bigger than the other three added together, you have equity, even if it's thin. If it's smaller, you're underwater, and the sale needs a plan for the gap before it goes on the market.

What are your options when the house is worth less than you owe?

These are the paths I see most. Which one you take is a decision for the two of you, your attorneys and your lender. My job is to put real numbers next to each one.

• Sell and bring money to closing. If the gap is small, some couples cover it from savings or another asset and close a normal sale. How that cost is shared is something your attorneys or mediator work out.
• One of you keeps the home. That usually means refinancing it into one name, and qualifying for a refinance on a home with little equity can be hard. Talk to a lender before you count on it.
• Wait. Paying the loan down, or giving prices time to move, can change the math. Waiting has its own cost, though, and somebody has to make the payments in the meantime.

What if the sale won't cover the mortgage?

Then the lender has to be part of the plan before the house is listed. Your lender or servicer has to agree to any sale for less than the payoff, so talk with your servicer, a free HUD-approved housing counselor and your attorneys first. Whatever the answer, both of you should hear it at the same time, the same way you get every other number from me.

What happens if nobody pays the mortgage?

This is the outcome to avoid. New Jersey is a judicial foreclosure state, which means a foreclosure runs through the court system, and the courts offer free foreclosure mediation. But missed payments land on both people named on the loan, whatever the divorce papers say about who should pay. In the CFPB's words, a divorce decree can assign a debt to one spouse, but "a creditor can still collect from anyone whose name appears as a borrower."

If payments are already behind, tell your attorney now, and talk to the lender before it turns into a foreclosure. A sale with a plan is almost always better than a sale on someone else's timeline. If you're weighing who stays in the home while it's for sale, read the questions to ask your attorney about staying in the house.

How do you sell a home with thin equity without making it worse?

With little equity, every dollar of price and every dollar of cost matters more. Here's how I run it:

1. One market value for both of you. I prepare it from closed sales and send it to both owners, and both attorneys if you want them copied, at the same time.
2. A net sheet for each plan. Sell as-is or sell after a short list of repairs. Same format, same assumptions, side by side, so nobody is comparing apples to oranges.
3. Repairs only where they pay. I'm a former New Jersey home builder and residential remodeler. If a repair won't come back in the price, we skip it. More on that in fix it or sell as-is in a divorce.
4. The right price on day one. A home with thin equity can't afford a slow start and a string of price cuts. See why the first two weeks matter in a divorce sale.
5. Everything in writing, to both owners. Offers, showing feedback and lender requests go to both of you together. Nobody gets a private version of the sale.

Frequently Asked Questions

Can we sell the house in a divorce if we owe more than it's worth?

Yes, if the gap is covered at closing or your lender agrees to a sale for less than the payoff. Talk with your servicer and your attorneys before you list. Your attorneys work out how any shortfall is shared.

Do both spouses have to sign to sell?

Both owners on the deed sign the listing and the sale contract. If cooperation is a problem, tell your attorney before the home goes on the market.

Who pays the mortgage while the house is for sale?

Whoever your agreement, your attorneys or the court say should. But the lender can still collect from both people named on the loan, whatever the divorce papers say, so settle it before the house is listed and keep the payments current.

Is it worth selling if there's no equity left?

Sometimes it is, because the sale ends the monthly payment and the shared debt. Whether that beats keeping the home is a question for your attorney, your lender and your financial advisor, and I'll give all of them the same numbers to work from.

This is general information, not legal, tax or lending advice. Talk to your attorney, tax professional or lender about your own situation.

About the author

Dennis Mark Interdonato is a REALTOR® and Master CDRE® who leads The Dennis Mark Group at Keller Williams Realty Ocean Living in Point Pleasant, NJ, helping buyers and sellers throughout New Jersey make their next move, with Monmouth and Ocean County as home base. He's a former New Jersey home builder and residential remodeler. Read more about Dennis Mark.

Keep reading

• The divorce home sale guide
• How Dennis Mark handles divorce sales
• What divorce attorneys and mediators want from your realtor
• Do you pay tax when you sell your home in New Jersey?
• Have a question this didn't answer? Send it to Dennis Mark.