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 on the mortgage is awarded the marital home, and thus is required to refinance the current mortgage into their name as part of the divorce settlement agreement, the issue of “Continuity of Obligation” may arise.
In most cases, 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
- the borrower on the new refinance was added to title 24 months or more prior to the disbursement date of the new refinance mortgage.
HOWEVER, there are exceptions.
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.
Thus, Continuity of Obligation may be established through a settlement agreement.
There are two types of refinance that usually apply in a divorce situation: Limited Cash Out Refinance or Cash Out Refinance. In a Limited Cash Out Refinance (also known as an Equity Buy Out), either no cash is taken from the equity in the property or cash is taken out of the equity only for the person who will no longer own the home. In a Cash Out Refinance, either or both parties may obtain cash from the equity of the home. (Learn more in my post: Can I Keep the House?) In either case, it is important to establish Continuity of Obligation.
What if the divorcing borrower does not currently live in the property?
It is common in a divorce situation that one of the parties is not living in the marital home at the time of the divorce but is awarded the marital home through the divorce settlement agreement. It is also common that one divorcing party is awarded an investment property that will now become their primary residence.
If a borrower is currently on title for the property, and has been for the preceding 12 months, that borrower does not have to also be living in the subject property and may qualify for a Limited Cash Out Refinance as long as they can show:
- They have paid the mortgage for at least 12 months,
- They can demonstrate a relationship with the current obligor (relative, domestic partner as an example) and can document they were awarded the property through divorce or legal separation.
There are many variables with mortgage financing in divorce situations. Working with a qualified divorce lending professional is always an advantage for the divorcing. Please don’t hesitate to contact me if I can provide clarification and assistance.