Divorce and home loans: what to do

Divorce and home loans: what to do

Divorce and home loans: what to do

In divorce proceedings, the parties have several ways to resolve both the liabilities in the claim and the ownership of the associated property.
Divorce  is undoubtedly a very important decision in the life of a couple and, in this sense, in addition to all family and social aspects, all issues related to housing as well as the responsibilities that emanate from a home loan that may be associated must be taken care of.
Although there is a decrease in the number of divorces (and marriages ), as the chart below indicates, the financial system, the real estate market and the legal framework in Portugal are already equipped with a set of tools and solutions that can allow a divorce process, in the context of the existence of a home loan, it can be carried out with some speed.

1. Confirm owners, borrowers and purpose of the dwelling

Typically the members of the couple are co-owners and co-borrowers (in plain language, co-debtors) in the same percentage, respectively in the property and the associated home loan. It is also common for banks to require domiciliation of the payment of installments in a joint account, so it is this more normal scenario that we consider in this piece.
Finally, also in most cases, the property given as collateral in the credit agreement is intended for permanent  own housing (where the couple and children live) or, to a lesser extent,  for a secondary dwelling (a holiday home for example).

2. Valuation of the property and amount owed

In the antechamber or already with the ongoing formalization of the divorce process, the couple must first request an evaluation of the property, and for this purpose may contact a real estate agent in which both are in agreement or,  if they prefer, a real estate agent for each of the parties and thus obtain two values (and an average) of reference for the house, which somehow can free the couple from any more emotional appreciation that each one can naturally attribute to the house.
With a notion of the market value of the property, the couple should confront with the amount owed in the home loan, that is, with the amount of capital that still remains to be amortized (maturing capital), thus obtaining the so-called LTV (Loan-to-value = amount in debt / value of the property).  The solution to be implemented will be faster and easier the lower this indicator. That is, if for example it is 30%, it means that if the property is worth € 100,000 and if the couple sells it for this amount (to a third party or one of the spouses), you will be able to repay the debt fully (€ 30,000) and there are still € 70,000 left. 
It is at this stage that the couple should make a first decision as to the strategy to implement, and should also seek the advice of real estate agents in order to also begin to identify properties for purchase or lease. 

3. Contact and inform the bank

After these previous steps, the couple must then inform the banking entity of their decision, whether or not it is formally officialized. At the same time you can and should have thought of some alternatives regarding other potential financiers, whether it is another bank where you are already a customer(s) or a credit intermediary.

4. Sale of the house on the market and repayment of the loan

In this circumstance, the couple chooses to place the house on the market and sell it to a third party, an operation that is highly recommended to be done by one or more real estate agents mandated for this purpose.  If there is a home loan to pay, the remaining proceeds of the sale (and consequent taxation, i.e., payment of any capital gains) is distributed among the two members of the couple according to their percentage of ownership. It should be noted that, for the calculation of capital gains, the real estate commission reduces the value of the capital gains calculated.


5. Sale to one of the spouses and disconnection of the credit 

One of the spouses may also choose to sell his share of ownership in the property to the other and, consequently, disengage from his share of credit liability. Here we have to consider the following:
  • First of all, it is important to determine the torna, that is, the amount that one of the spouses must pay to the other to keep their share. In a simple way, the value of the torna is equal to the share – of the one who gives up – of the (market) value of the asset, deducted from the share part of his credit liability that the purchasing spouse will assume;
  •  LTV (amount owed / value of the property) is the same, but now it can be given the aggravating factor of being only one of the spouses to pay the remainder of the loan; 
  • However, according to the law, the creditor bank may not aggravate the contracted spread as long as the effort rate of the spouse who keeps the property is less than 55% or 60% if he has two or more dependents in charge;
  • However, the creditor bank may, however, require additional guarantees (other property, savings) or the extension of the term of the contract;
  • In case of agreement between the parties and acceptance of the request by the bank, an amendment to the contract will be signed by all parties involved (guarantors included, if any), which certifies that the house is now of only one of the spouses;

6. Sale to one of the spouses and new credit agreement

In the event that, if there is agreement as to the return, the creditor bank does not accept the disengagement of one of the debtors, the acquiring spouse may contract a new financing with another institution which, will have as collateral the property and whose financed amount will have to be sufficient to amortize the entire losing credit and, if necessary, pay the return to the spouse who sells

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