Frequently Asked Questions: Options When a Home Is Underwater In Colorado Divorce

A home is "underwater" when the outstanding mortgage balance exceeds the property's current fair market value, creating negative equity. For example, if a property is worth $192,000 but the mortgage balance is $237,000, the homeowner has a deficiency of $45,000. This means that the home could only be sold at a loss.

Writer’s Practice Experience Note: Underwater homes are not as common in Colorado due to the economic growth here. However sometimes they occur in homes that parties own in other states.

There are two common approaches:

1. Keep the House: One spouse retains the property and assumes responsibility for the mortgage, potentially through loan modification programs.
2. Sell the House: The parties arrange a sale (often a short sale).

A short sale occurs when the lender agrees to accept less than the full mortgage balance as satisfaction of the debt, allowing the property to be sold.

Yes, but removing the non-resident spouse's name from the mortgage is challenging unless the loan is assumed, refinanced, or paid off. The mortgage company generally will not release a party from liability based solely on a divorce decree.

The non-resident spouse remains fully liable for the mortgage debt if the resident spouse stops making payments. Additionally, the outstanding mortgage obligation may negatively impact the non-resident spouse's credit and ability to qualify for new financing of his or her own.

Foreclosure does not automatically eliminate a mortgage deficiency. The mortgage lender can pursue either or both parties for the remaining balance after the foreclosure sale, however often does not unless one or the other party earns a high income.