In a divorce settlement, there is more to address than just dividing net proceeds or equity ownership. One crucial aspect is the mortgage escrow account, which holds periodic payments for real estate taxes, mortgage insurance, and possibly homeowner's insurance. Understanding how to manage this account during a divorce can prevent future conflicts.
What is a Mortgage Escrow Account?
A mortgage escrow account accumulates funds over several months from prorated payments for real estate taxes. In many regions, property tax payments are required on a semi-annual or annual basis, causing escrow accounts to build up until these payments are made. If the home is sold before tax and insurance payments are due, there will likely be funds remaining in the escrow account. Lenders must return these funds to borrowers once their loan accounts are closed.
Disbursing Net Proceeds from the Marital Home
Disbursing net proceeds when selling or refinancing the marital home can range from straightforward to complex. The title company or settlement agent must ensure all proceeds are disbursed according to the final separation and divorce orders. Providing the settlement agent with a copy of the final orders and having your attorney review the disbursement sheet is advisable.
When selling the marital home, it is crucial to give the settlement agent the disbursement orders in advance to ensure documents are prepared accordingly. While a 50/50 disbursement is common, there are instances where this does not apply. For example, if one party continued to make mortgage payments post-separation, they might be eligible for reimbursement. The same applies to repairs and maintenance.
In some cases, one party may be compensated for their share of the other party's retirement account or other assets through the disbursement of net proceeds from the home sale.
Release from Liability
If one party relinquishes their ownership, they should also be released from any liability. This release can only be achieved through modification, refinance, payoff, or sale. Understanding this process is crucial in today’s world where break-ups are frequent, and having the necessary experience to navigate mortgage loan issues is imperative.
Setting Up a New Escrow Account
One often misunderstood aspect of refinancing into a new mortgage is setting up the new escrow account and the associated costs. The funds required to establish a new escrow account depend on the timing of current and future property taxes and homeowners insurance due dates. This can significantly impact the amount added to the new mortgage or require additional cash at closing.
Handling Future Reimbursements
In divorce situations, many clients are unaware of how future reimbursements of existing escrow accounts are handled when paying off or refinancing an existing jointly held mortgage. Whenever a jointly held mortgage is paid off, the current lender will send a joint check made payable to both parties for any refunds on overpayment and escrow balances. It is essential to inform divorcing clients how overpayments will be handled to avoid future conflicts over who should receive the funds, as both parties will need to endorse the check.
The Role of a Certified Divorce Lending Professional (CDLP®)
As a divorce mortgage planner, the CDLP® can help divorcing homeowners make informed decisions regarding their home equity solutions while assisting the professional divorce team in identifying potential conflicts between the divorce settlement, home equity solutions, and real property issues.
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process can help divorcing homeowners set the stage for successful mortgage financing in the future.
Disclaimer
This information is for educational purposes only and not for providing legal or tax advice. Contact an attorney or tax professional for legal and tax advice. Interest rates and fees are estimates provided for informational purposes and are subject to market changes. This is not a commitment to lend. Rates change daily—call for current quotations. The information in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education.
