If you have equity in your home and are facing foreclosure, it’s understandable that you may wonder what will happen to your equity. The question of what happens to equity during foreclosure could be even more complicated if you’re also going through a divorce.
Divorce and foreclosure can impact your equity. Foreclosure may pull from your equity to pay penalties or fees. Divorce may divide equity between spouses when changing ownership.
If you’re facing foreclosure, working with a foreclosure attorney may be a good idea. An experienced attorney can help advise you on the best options for your situation.
Contact Denbeaux Law today to learn more about foreclosure and how we may be able to help you.
What is Home Equity?
Home equity is the amount of your home you own outright, even if you still owe on your mortgage. To calculate your home equity, you can take the market value of your home and subtract the amount you owe on your mortgage. What is left over is the amount you own in your home and your total equity.
Typically, equity is the amount of money you can expect to gain if you sell your home. There are ways that you can take advantage of home equity, but they involve taking loans out against your home. In general, your home equity lives in your home as money you can’t access until you sell the house.
How Does Equity Work in Foreclosure?
If your house is foreclosed on, any home equity that you have will be used to pay fees and penalties associated with the foreclosure. Any equity left over after paying off the fees and penalties will go to the homeowner.
It is important to take steps during foreclosure to preserve as much of your equity as possible. Lenders may use techniques to reduce the amount of equity they get to keep after foreclosure.
Divorce and Home Equity
Divorce can complicate home equity and how it is divided. As part of the divorce settlement, responsibility for the mortgage is usually decided. This will determine which spouse gets to stay in the home, if the other spouse needs to be bought out, and what assets they may get in return for giving up the home.
If you find yourself in a position where you have to buy your ex-spouse out of your home, you could take advantage of your home equity to do so. You can refinance your mortgage to take your ex off the mortgage and take out a larger mortgage to have the funds to buy them out of the house.
Receiving funds from your home equity will depend on your divorce and house equity situation. If your spouse buys you out of the home and then sells the house in the future, you would not be entitled to any of the equity from that sale.
Mortgage Refinance
A mortgage refinance pays off your current mortgage by replacing it with a new mortgage. Mortgage refinancing can be common after divorce to change the terms of a mortgage or remove an ex from a mortgage.
A mortgage refinance can impact home equity. You could refinance for the same loan amount but with better terms, which wouldn’t impact your equity.
In a lot of cases, people do cash-in or cash-out refinances. With a cash-in refinance, you add a significant down payment through the refinance, which increases home equity. If you receive a lot of money through your divorce, a cash-in refinance could be a good option for you.
A cash-out refinance is when you refinance with a larger loan to get access to some of your home equity in cash. You could cash out for a variety of reasons. You can use a cash-out refinance to help buy your ex out of the house. A cash-out refinance reduces the amount of equity in a home.
Loan Modification
If you want to keep your home without your spouse after divorce but can’t afford the mortgage on your own, a loan modification could be a great option. A loan modification is an agreement between you and your lender to modify the terms of your loan. Getting a loan modification shouldn’t have any impact on your home equity.
Due-on-Sale Clause
A due-on-sale clause is a specification in some mortgages. With a due-on-sale clause, your mortgage requires the full payment of the outstanding mortgage balance if your house is sold or conveyed.
If your spouse conveys their interest in the mortgage to you, this could trigger the due-on-sale clause. In this situation, you would be responsible for paying the total outstanding balance on your mortgage. However, transferring property in a divorce is not usually cause for triggering a due-on-sale clause.
A due-on-sale clause could impact equity if it’s triggered. Because the outstanding mortgage balance has to be paid off, you may need to sell or refinance the home to take advantage of your home equity and pay off your outstanding mortgage.
Divorce, Home Equity, and Foreclosure
Divorce can complicate homeownership and foreclosure proceedings. Foreclosure proceedings can be difficult on their own, but potentially changing ownership of the home and going through a divorce can make it easier for issues to arise.
If you don’t keep the home in a divorce, it’s important to remove your name from both the deed and the mortgage, especially if the home is already in foreclosure. It’s important to remember to change the lender paperwork and not simply sign over the title.
You are considered responsible if your name is on the mortgage. When adding divorce to the situation, this means that if your ex were to default on the mortgage, it would impact your credit, and you could be subject to foreclosure.
Contact a Foreclosure Attorney
Going through foreclosure can be complicated, especially if you are also going through divorce proceedings. Not only can emotions and tensions be high, but it’s easy for there to be issues with who’s in possession of the home and who should be responsible for the mortgage.
If you’re transferring ownership of a home due to divorce, it’s important to make sure that you’re completely off the title and mortgage to protect yourself and your credit in the event of foreclosure. If your name stays on the mortgage after divorce, you need to ensure you receive any equity you’re entitled to after foreclosure.
There are a lot of specific procedures and steps that accompany foreclosure when divorce is involved. Working with a foreclosure attorney can help make sure that your homeownership and mortgage are accurate following your divorce.
Contact Joshua Denbeaux today to learn more about equity in foreclosure during divorce and how we may be able to help you.
