I’ve written articles before about issues to consider if you’re going through a divorce and have a mortgage…what if you were never married? Couples (or single people) often buy homes together…what if worse case scenario, it doesn’t work out and one party wants to keep the home?
A divorce decree allows you to refinance to cash out the other spouse and still have the mortgage treated as a “rate term” refinance. There are significant differences between a cash-out and rate-term refinance. A cash out refinance is limited to an 85% loan-to-value and the rate is higher (approx. 0.5% in fee at an 80% loan to value with credit scores of 740 and higher). If there is a court order, it’s possible that FHA might allow a cash-out refi with a non-married co-owner.
There’s also the issue of excise tax. An excise tax affidavit is filed whenever a deed is recorded (in the State of Washington). Excise tax may not be due when the person being removed from vesting is pursuant to a divorce decree. However, when there is no decree or court order involved and the person is being removed, excise tax may be due as they consider the transfer of that person’s interest to the other person “a sale“. I’m told the county may charge excise tax on half of the underlying mortgage. As of the date this post was published, King County charges 1.78% for excise tax. Possible exceptions to this would be if the co-owners were registered as domestic partners, or the transfer of the property to one co-owner is by court order.
Just like a divorce, simply deeding the property over to the party who’s remaining in the home does not remove the other person from responsibility or liability of the mortgage. And it probably makes good sense to contact an attorney who specializes in divorce to assist with the separation of the real estate property.
EDITORS NOTE: This post was written in 2009 and may not be as accurate with regards to excise tax with laws regarding recognizing partners since the writing of this post.