Getting Divorced with No Equity in Your Home

Ideally, if you are getting divorced, you will have money in your bank accounts, reliable retirement savings, and some equity in your home. While you can’t keep everything under Colorado property division laws, the more you start with, the more you should end up with. Unfortunately, divorce isn’t usually an ideal situation, and many factors in divorce aren’t perfect either. One of these sometimes inopportune factors is negative home equity.

READ — Should I Keep the House in the Divorce? 

Home values decline for many reasons. Most are out of your control, including recession, the economy, foreclosures in your area, or a rise in neighborhood crime. Real estate market fluctuations often result in negative financial consequences for homeowners, especially if a couple wants to sell their home in a divorce but their mortgage is upside down.

If you don’t have equity in your home, do you wait until the housing market picks back up to divorce? Doing so isn’t ideal either, as you never know how long that might take. Being stuck in a marriage to grow your home equity isn’t a comfortable or wise position to be in. So, how can you handle a divorce with no equity in your home?

Options for Couples with No Home Equity

Thankfully, you have options, even in this less-than-ideal situation. Whatever is best for you and your spouse will depend on your goals and future plans. No matter which option you choose, it’s crucial to carefully weigh the pros and cons of each before making a decision. Such a decision can impact you and your family far into the future.

Foreclosure or Short Sale

This is often the least desirable option, but you can let the lender foreclose on your home or ask the bank if a short sale is an option. Unless you plan on filing for bankruptcy, either of these options can have severe repercussions on your credit for years to come. Considering this, it’s usually best to avoid these options if possible.

Rent the House

If neither of you wants to stay in the house or you can’t agree on who should remain, you both have the option of moving out but renting your home. You can continue to rent the house until its value appreciates enough that it can be sold for more than the total owed on the mortgage. Renting can be beneficial as you may earn some income on top of paying for the mortgage, and it buys you time to let your house appreciate. However, renting has cons, such as sharing the profit with your soon-to-be ex-spouse and managing a rental property or paying someone else to do it for you.

READ — Understanding Divorce Impacts on a Family Business 

One Spouse Lives in the Home

One spouse can remain in the home post-divorce. This is a personal decision between couples that sometimes involves a family court judge. The couple may decide that one spouse should live in the home, as opposed to renting it out, until the home value appreciates enough to make it worthwhile to sell. This situation might make the most financial sense for some couples. However, one drawback to this arrangement is that the spouse who moves out may not be able to purchase another property with the family home still on their credit report.

Divorce requires many difficult decisions, especially if you don’t have any equity in your home or have negative equity. You may feel uneasy making these decisions on your own or even wonder if you are being taken advantage of by your spouse. Therefore, hiring an experienced divorce attorney is essential to help you navigate this difficult path.

Jones leads the Sam Cary Bar Association in a second term as President (2005 and 2021). She obtained her Bachelor of Arts degree from the University of California at Berkeley, and earned a Juris Doctorate from the University of California, Hastings College of Law. Jones is a member of the California State and Colorado State Bars and is a 2021 recipient of the Denver Business Journal “Outstanding Women in Business Award.”