Often times in a divorce situation only one of the parties is currently obligated on the mortgage for the marital home. When the party who is NOT obligated is awarded the marital home and is now required to refinance the current mortgage into their name as part of the divorce settlement agreement, the issue of “Continuity of Obligation” may arise.
Continuity of Obligation: Occurs on a refinance when at least one of the borrower(s) on the existing mortgage is also a borrower on the new refinance transaction secured by the subject property. Or, continuity of obligation is met when the borrower on the new refinance was added to title 24 months or more prior to the disbursement date of the new refinance mortgage.
Permissible Exceptions to Continuity of Obligation
When a refinance transaction does not meet the definition of Continuity of Obligation, a new refinance transaction will be eligible and not bound by the limited eligibility parameters when the lender can establish and document that the new borrower acquired the property through an inheritance or was legally awarded the property (for example, divorce, separation, or dissolution of a domestic partnership). There is no minimum waiting period with regard to when the borrower acquired the property before completing a new refinance transaction
Although Continuity of Obligation may be established through the divorce settlement agreement, determining the type of refinance transaction as to whether it is considered a “Cash Out” or “Limited Cash Out Refinance” refinance is of significant importance as well.
When refinancing an existing mortgage lien, the refinance purpose will generally dictate whether the transaction is considered a “Cash Out” refinance or a “Limited Cash Out Refinance” refinance. There may be adjustments to interest rate, limitations to loan-to-value, etc. depending upon the classification of the transaction which can restrict access to the amount of equity, if any, the departing spouse is awarded.
The best scenario for divorcing clients is to qualify for a “Limited Cash Out Refinance” which typically offers better interest rates and less restrictions with regards to loan to value limitations. In order for a refinance transaction to be considered as a Limited Cash Out Refinance, the new transaction must be used to pay off an existing first mortgage, including the payoff of a subordinate lien used to purchase the property by obtaining a new first mortgage secured by the same property.
- Continuity of Obligation must be demonstrated.
- The subject property must not be currently listed for sale.
- Proceeds from new transaction may not be used to pay off a subordinate lien that was not used to purchase the property
Refinances to Buy Out an Owner’s Interest
In order for a new refinance in a divorce situation to be considered as a Limited Cash Out Refinance when drawing equity out of the home, the subject property must be jointly owned for at least 12 months preceding the date of the mortgage application.
- All parties must sign a written agreement that states the terms of the property transfer and the proposed disposition of the proceeds from the refinance transaction (typically covered in the Divorce Settlement Agreement);
- Borrowers who acquire sole ownership of the property may not receive any of the proceeds from the refinancing.
- The party buying out the other party’s interest must be able to qualify for the mortgage pursuant to underwriting guideline.
When the new borrowing spouse has not been on title for the preceding 12 months, the new refinance transaction will be considered a “Cash Out Refinance” and again may present both a higher interest rate as well as restrictions to the access of existing equity in the subject property.
About Bill Leeper
Bill is a founding partner of Your Colorado Home Group based in Denver andhas a long record of successfully guiding local, national, and multi-nationalclients in buying, selling, and investing in real estate.
Bill specializes in assisting individuals facing divorce deal with theirreal estate issues. He is certified with CREDS (Certified Residential RealEstate Divorce Specialist) and CDREP (Certified Divorce Real EstateProfessional), GRI (Graduate Realtor Institute) and CNE (Certified NegotiationExpert and CDPE (Certified Distressed Property Expert) designations.
From the 4Sale by Divorce Newsletter. This is for informational purposesonly and not for the purpose of providing legal or tax advice. You shouldcontact an attorney or tax professional to obtain legal and tax advice.Theinformation contained in this newsletter has been prepared by, or purchasedfrom, an independent third party and is distributed for consumer educationpurposes. Copyright 2017 All Rights Divorce Lending Association, LLC