A Refinance Deadline Doesn't Guarantee a Refinance

When one spouse plans to keep the marital home after divorce, the settlement may require that spouse to refinance the existing mortgage within a certain period of time.

The intention is usually clear: the retaining spouse keeps the home and the departing spouse is ultimately released from the existing mortgage obligation.

But a refinance involves something the divorce agreement itself cannot guarantee: loan approval.

A recent article from the Divorce Lending Association (DLA) explores what can happen when a divorce decree requires refinancing, but the anticipated loan never closes.

The article examines two appellate decisions with remarkably similar circumstances but very different outcomes.

Similar Circumstances, Different Results

In the first case discussed by DLA, the agreement made the transfer of the departing spouse's interest in the property conditional upon the refinance closing.

The refinance never closed.

Because the transfer was tied to the refinance, the parties remained co-owners of the property, and partition remained available as a potential remedy.

In the second case, the agreement was structured differently.

One spouse was granted exclusive possession of the property, and the parties were required to cooperate with a refinance. However, the transfer of the property interest itself was not conditioned upon the refinance occurring.

When the anticipated financing didn't happen, the court found there was no enforceable obligation requiring the property to be sold.

The circumstances were similar. The refinance failed in both situations.

What differed was how the agreement had been structured before the problem occurred.

A Court Order Cannot Create Mortgage Approval

The DLA article also highlights an important distinction between something a party refuses to do and something a party is unable to do.

A court may have mechanisms available when someone refuses to sign a document or take an action required by an order. DLA discusses remedies such as Rule 70, the appointment of an elisor, or contempt depending on the circumstances and jurisdiction.

Mortgage qualification is different.

A court cannot approve a mortgage application on behalf of a lender.

Even when a divorce decree requires refinancing, the borrower must still satisfy the lender's applicable underwriting requirements.

That means the ability to refinance may depend on factors such as income, debts, credit, assets, support obligations or income, the amount being financed, and the requirements of the particular mortgage program.

A deadline can require action. It cannot guarantee qualification.

Why the Difference Matters During Settlement

The legal language used in a divorce agreement is the attorney's responsibility, and the appropriate provisions and remedies will depend upon the facts of the case and applicable law.

From a California divorce mortgage planning perspective, however, there is another important consideration:

If the settlement depends upon one spouse obtaining financing, it can be helpful to understand the mortgage feasibility before the agreement is finalized.

For example, if one spouse intends to keep the home and refinance, questions may include:

• Will the anticipated post-divorce income support the new mortgage?
• Will support income be needed for qualification?
• Will the retaining spouse need additional financing to complete an equity buyout?
• How will debts and support obligations affect qualification?
• Are there timing or documentation requirements that could affect the proposed refinance?

Answering mortgage questions earlier can provide useful information to the client and legal team while the settlement is still being developed.

Documentation Can Become Important

The DLA article also discusses the importance of documenting what occurs when refinancing is required.

Mortgage applications, lender correspondence, preapproval documentation, denial letters, and other records may help establish whether a borrower made the required effort and what prevented the financing from being completed.

The legal significance of that documentation is a matter for the attorneys and court.

From the mortgage side, maintaining clear records of the financing process can help document what was attempted and what occurred.

The Bigger Lesson for Divorce Professionals

The two cases discussed by DLA illustrate why a refinance provision involves more than simply choosing a deadline.

Attorneys determine how the agreement should be drafted, what conditions should apply, and what remedies may be appropriate if the anticipated financing doesn't occur.

For California divorce professionals and their clients, a divorce lending professional can provide a different piece of the analysis by evaluating the mortgage feasibility behind the proposed plan.

Those two disciplines work together.

The legal agreement establishes the obligations between the parties.

The mortgage analysis helps determine whether the financing contemplated by that agreement appears achievable.

The Bottom Line

When a divorce settlement depends upon a future refinance, there are two separate questions:

What does the agreement require?

And:

Can the proposed financing actually be completed?

A recent Divorce Lending Association article demonstrates how important that distinction can become when a refinance never closes.

Addressing both the legal structure and mortgage feasibility before the agreement is finalized can give divorcing homeowners and their professional teams a clearer understanding of the plan they are putting in place.

Read the Original DLA Article

This blog was adapted from educational content published by the Divorce Lending Association. For a more detailed discussion of the appellate decisions, enforcement considerations, and eight drafting considerations for refinance provisions, read the full article:

https://lnkd.in/gvKxuuHb

Source: Divorce Lending Association, Can a Divorce Decree Force a Refinance? What Courts Can Order.

About Janice Nugent

Janice Nugent is a Certified Divorce Lending Professional (CDLP®) and Certified Mortgage Planning Specialist (CMPS®) who helps divorcing homeowners understand how mortgage qualification, home equity, income, and settlement decisions may affect their housing options during and after divorce.

Janice works alongside family law attorneys, mediators, financial professionals, and other members of the divorce team throughout California to provide mortgage analysis before important housing decisions are finalized.

Janice provides mortgage planning and lending guidance and does not provide legal, tax, investment, or financial planning advice. Clients should consult the appropriate licensed professionals regarding those matters.

📩 Janice@JaniceNugent.com
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