The details of real property involved in a divorce situation can play various factors when mortgage financing is needed. This article addresses some of the more commonly overlooked details.
The two most often questions regarding real property during divorce:
• What’s it worth?
• How much do I get?
These are fair questions for the marital balance sheet; however, when the marital home is being retained by one party, a few more details need to be addressed to ensure optimal mortgage financing for the borrowing spouse.
Who’s on the title, and why does it matter? First, both spouses are not always listed as owners on the title to the real property. However, this does not automatically preclude the spouse not on title from refinancing the existing loan into their name. Once the non-titled spouse is awarded the real property, they become a Successor of Interest which allows them to refinance the existing mortgage into their name.
However, who’s on the title does come into play when an equity buy-out is needed. When the borrowing spouse has not been on the title to the real property for the previous twelve months, access to the equity in the home may be limited.
Who’s on the current mortgage, and why does it matter? When the spouse who is retaining the marital home is not on the existing mortgage, new mortgage financing may still be obtained as there is no longer a need to meet the continuity of obligation as required in the past. There are; however, a couple of issues to address:
1. When the spouse whose name is on the existing mortgage transfers ownership to the spouse now retaining the home, the current mortgagor should be notified, so they don’t begin the process of accelerating the due on sale clause of the mortgage note. In addition, the retaining spouse should inform the lender that they are exercising their right to assume legal responsibility for paying the existing mortgage under the Garn St. Germain Act. Note: Assuming legal responsibility for paying the current mortgage is not the same as assuming the loan and does not release the original borrower from their legal obligation of the existing mortgage.
2. Suppose the retaining spouse is refinancing the existing mortgage. In that case, any overpayments to the current lender or escrow account balances will be refunded directly to the spouse obligated on the existing mortgage. Escrow accounts are in place for the direct payment of property taxes when they become due and payable, usually in the following year, leaving an unpaid tax liability on the real property. Once the existing mortgage is refinanced, and ownership is transferred to the retaining spouse, they are now responsible for paying the property taxes when due. Any current escrow account balance on the real property should be addressed as to how any refunds should be awarded.
3. Access to information on the existing mortgage may be denied. In most situations, when one spouse is retaining the real property and refinancing the existing mortgage into their name only, a mortgage payment history is required. When the borrowing spouse is not on the current mortgage, obtaining the required payment history is complicated. Setting the proper expectations and gaining the cooperation of the non-borrowing spouse can help make the transaction much smoother and less complex in gathering the required documentation.
How is the real property value determined, and why does it matter? There are multiple ways to determine the value of the real property. The two most common methods for obtaining real property value are obtaining an appraisal from a licensed appraiser or having a real estate professional provide a CMA— but what’s the difference between the two? Both methods are an opinion of value, and no two will ever give you the same value. The primary difference is perspective.
• A licensed residential appraiser completes an appraisal, who bases their opinion of value on recent comparable home sold sales data.
• A Comparative Market Analysis (CMA) is completed by a licensed real estate professional who bases their opinion of value on what the property may potentially sell for in the current real estate market.
While both opinions of value are valid, it is crucial to understand the perspective of each opinion and how the two methods apply to the current situation of the marital home. For example, when considering the option of one spouse retaining the marital home and refinancing, an appraisal may be the better option. On the other hand, if considering a sale of the marital home, a CMA may be a better option.
When the real property is to be refinanced, the mortgage lender must order their own lender-owned appraisal from a licensed appraiser. It may be advantageous to have the lender request the appraisal to determine value during the settlement process, so everyone uses the same valuation removing the risk of multiple values.
The devil is in the details. What might seem simple at first glance may be more complex than thought.
Divorce Mortgage Planning is a holistic approach to the process of evaluating mortgage options in the context of the overall financial objectives as they relate to divorcing situations. As a divorce mortgage planner, a CDLP™ can help you identify any potential conflicts between the divorce settlement, financial planning, and home equity solutions, as well as any real property issues involved in your case.
The role of the CDLP™ is to help integrate the mortgage selected into the overall long and short-term financial and investment goals to help minimize taxes, minimize interest expense, and maximize cash flow. In addition, our goal is to help divorcing homeowners make more informed decisions regarding their home equity solutions and mortgage financing opportunities during and after the divorce.
Incorporating divorce mortgage planning into the settlement process makes it easier to identify possible solutions and assists both parties in letting go of counterproductive positions and emotions. In addition, a CDLP™ can assist in taking stock of possibilities, resources, and answers regarding the marital home, other real property, and mortgage financing opportunities.
A successful divorce settlement results from effective communication and strategic negotiations in such a manner that both divorcing parties come out whole or at least on the road to recovery. Working together as a team and incorporating divorce mortgage planning into the settlement cycle with a Certified Divorce Lending Professional will ultimately result in a better solution and better outcome for the divorcing couple.
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
If you’re interested in purchasing a new home or refinancing in the Portland area, be sure to contact us today to find out how we can help make your dreams come true.