Is Moving Because of a Divorce a Hardship and a Reason for a Short Sale?
The division of marital assets during a divorce proceeding is among the most stressful life challenges a couple can face. Although divorce is considered a legitimate hardship when applying for a short sale, couples with significant nonretirement assets or equity won't qualify. Some couples may even consider getting a paper divorce just to qualify as a hardship. Remember this: lenders only care if you have a legitimate financial hardship ---those who don't won't qualify.
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Hardships and Documentation
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A divorcing couple often needs to sell their primary residence if neither spouse can afford the home on their own. If the home is significantly "underwater," meaning the market value of the home is less than the outstanding mortgage, they should consider a short sale.
However, if the divorcing couple has enough cash or other means to satisfy the existing liens, a short sale most likely will not be approved. Lenders have stringent documentation requirements when approving a short sale. Homeowners need to supply at least two months' worth of bank and investment statements, including retirement --- although those funds are protected in a short sale --- paystubs, tax returns and even college savings and cash-value life insurance policy statements.
Couples also need to supply a hardship letter. If there is a true financial hardship, they should state that in the letter, along with the divorce paperwork.
Who Won't Qualify
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Couples, even divorcing couples, who haven't missed payments or clearly have the ability to liquidate nonretirement accounts to satisfy a lien will not qualify. Couples who wish to purchase new, separate residences following the sale should strongly consider satisfying the lien before considering a short sale. Lenders will consider income and available assets carefully, so a divorce on its own may not be enough to convince a lender to take less than the outstanding loan balance.
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Getting a Divorce to Secure a Short Sale
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Couples should not consider getting a paper divorce to secure a short sale. If your lender discovers that you are using a false hardship, you could be sued for fraud.
However, couples who are legitimately unhappy and are only living together because they think they can't afford to sell should strongly consider speaking to an attorney and a real estate agent. In approved short sales, couples -- divorced or not -- do not need to bring any cash to closing. The lender pays the agent's commission and attorney fees, as well.
Consequences
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Divorcing couples should not anticipate being able to purchase a new home for quite some time --- at least a year. Credit scores are significantly affected by short sales: even though the loan is recorded as "satisfied," it is not "paid in full," and credit reports note that distinction.
Couples should also expect the short sale process to be onerous and stressful. It's not uncommon for homeowners to supply the same documents multiple times to lenders, who lose them or never receive them to begin with. Updated statements should be kept handy at all times, in both fax and email formats.
Finally, couples should insist that lenders "release" the mortgage. This ensures that the divorcing couple is not sued at a later date for the forgiven mortgage balance.
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