In a divorce settlement agreement, it’s essential to address more than just the disbursement of net proceeds or equity ownership. A mortgage escrow account plays a critical role, designed to hold a homeowner's periodic payments for real estate taxes, mortgage insurance, and possibly homeowner's insurance.
How Does a Mortgage Escrow Account Work?
Mortgage escrow accounts accumulate money over several months, typically from borrowers' prorated payments for their real estate taxes. These accounts often build up large balances due to the timing of payments. Any excess mortgage escrow account balances must be properly accounted for and refunded after homeowners sell their homes.
In most parts of the country, counties require property tax payments on a semi-annual or annual basis, meaning escrow accounts tend to build up until taxes are paid. If the home is sold before tax and insurance payments are made, funds will likely remain in the escrow account. Lenders are required to return borrowers' escrow account funds once their loan accounts are closed.
Disbursing the Net Proceeds of the Marital Home Post-Divorce
Disbursing the net proceeds when the marital home is sold or refinanced during or after a divorce can be simple or 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 the documents are prepared correctly.
While most disbursements are typically 50/50, there are instances where this isn’t the case. For example, if one party continued to make mortgage payments post-separation, that party may be eligible for reimbursement. The same applies to repairs and maintenance.
In some marital settlement agreements, 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.
If one party is relinquishing their ownership, they should also be released from any liability. Release from financing can only be achieved by modification, refinance, payoff, or sale. Given the frequency of break-ups today, having access to experienced professionals to navigate the mortgage loan process is imperative.
Setting Up a New Escrow Account
One commonly misunderstood aspect of refinancing into a new mortgage is setting up the new escrow account and the associated costs. The amount of funds required to establish a new escrow account depends on the timing of when current and future property taxes and homeowners insurance are due. This can significantly impact the amount added to the new mortgage or require additional cash to close.
In divorce situations, many clients are unaware of how future reimbursements of existing escrow accounts are handled when paying off or refinancing a jointly held mortgage. Whenever a jointly held mortgage is paid off, the current lender will send a joint check made payable to both parties on the existing loan for any refunds on overpayments and escrow balances.
It is crucial to inform divorcing clients about how overpayments will be handled to avoid future conflicts over which party should receive the funds, as both parties will need to endorse the check.
Work with a Certified Divorce Lending Professional (CDLP®)
Always work with a Certified Divorce Lending Professional (CDLP®) when dealing with divorce and real estate or mortgage financing. A CDLP® can provide the necessary expertise to navigate these complexities.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
