Webster's dictionary defines divorce as, "to end marriage with one's spouse and to make or keep separate". Now I am pretty sure that all of the people who have gone through a divorce, or are currently enduring one, wish that the process was as easy as this simply put definition. The truth is that divorce is hard. I have seen clients become so absorbed with the process and misery of the situation, that if left to their own decisions, they would make hasty and faulty choices which would be extremely detrimental to their financial well being. Commonly, one of those choices is pertaining towards the division of the marital home and shared real estate.
Although the divorce itself may be complicated, there are generally only two alternatives to the dilemma of splitting a home: one is to refinance the property and the other is to sell it. Prior to making that decision there are certain facts that one should know about before moving forward. The facts are as follows:
Fact: Understand that a "Quit Claim Deed" alone only applies towards the title of the property and simply removes someone from title and not the loan obligation. Both parties are still equally liable for the loan in the event of a future foreclosure or non-payment on the note. Both individuals are still equally responsible in repayment of the existing mortgage.
Fact: By refinancing, the vacating party will be removed from the current mortgage obligation and title all at the same time. Refinancing is the best way to accomplish the goal of clear ownership as well as clear detachment.
Fact: Refinancing enables the individual retaining ownership to pay off the vacating party with the existing equity in the home, providing there is enough equity, and benefit from the tax deductibility of the mortgage. This eliminates having to tap into established retirement plans or other asset accounts and pay penalties associated with early withdrawal.
Fact: Sometimes due to the splitting of the household income, or the lack of equity within the home, refinancing is not an option. The only option may be to sell the property at that point. Keep in mind that there may be capital gain issues to address and you should seek the advice of your tax professional and/or a certified mortgage planner in this instance.
Keeping in mind the above mentioned facts, separation between two parties of one property can be done correctly and without the worry of any future issues arising. Should there be a situation with having to divide the value of multiple owned properties, then including the aid of both a tax professional and a certified mortgage planner is a must. They will be able to work together to give the clearest picture possible of what the divided assets are valued at, and provide a detailed explanation of any monies needed for payment and recapture of depreciation, capital gains, realtor sales commissions and more. This will allow clarity during the final negotiations and decisions of the divorce and minimize the loss of hard earned invested equity for both parties.
Scott Yonehiro is a certified mortgage planning specialist with First Security Lending in Burbank, CA. As a recognized professional in the field, Scott is frequently asked to speak at mortgage events and seminars. He has also published articles in several national industry magazines such as Mortgage Originator, Broker/Banker, and Broker/Agent Magazine. First Security Lending has ten offices throughout Southern California, and was recently voted "Best Mortgage Company" by the Los Angeles Times' Burbank Leader for the 6th year in a row. Scott can be reached at 818.333.1835 or via email at Scott@firstsecuritylending.com