It's common for parents to gift their children money for a down payment on a new home. But what happens when they want the money back during a divorce?
Newlyweds Sam and Ashley wanted to buy their first home together but needed help to make a down payment. Fortunately, Sam’s parents offered to gift them $50,000, making their dream of homeownership a reality.
Documenting the Down Payment Gift
Sam and Ashley had to document the source of their down payment as part of the standard mortgage approval process. Sam’s parents provided a gift letter confirming that the $50,000 was a gift, with no expectation of repayment.
The Divorce Dilemma
Six years later, as Sam and Ashley head towards divorce, they face decisions about their family home. Ashley wants to keep the house for their daughter but needs to refinance the mortgage in her name and pay Sam his share of the equity.
Upset about the divorce, Sam's parents now claim the $50,000 was a loan, not a gift, and they want it repaid.
Options for Repaying the Down Payment Gift
Option 1: Refinancing to Repay the Gift
Sam and Ashley could agree to repay Sam’s parents through the refinance. However, this could limit Ashley’s access to the home’s equity since the repayment isn’t a secured loan, categorizing the new loan as a ‘cash-out’ refinance. This limits the loan amount to 80% of the home’s value. It’s advisable to consult a Certified Divorce Lending Professional (CDLP®) for strategic solutions.
Caution: Repaying funds initially declared as gifts could raise legal issues, potentially suggesting mortgage fraud.
Option 2: Arguing the Gift Letter
Ashley could argue that the down payment was a gift, as the original gift letter stated. The letter explicitly noted that the money was a gift with no expectation of repayment.
Potential Consequences and Emotional Impact
Regardless of the chosen option, relationships may be strained. Parental involvement in divorce can complicate settlements and heighten emotions.
The Role of a Certified Divorce Lending Professional (CDLP®)
Involving a CDLP® in the negotiation process offers strategic solutions. A CDLP® can clarify and suggest language for the settlement agreement to prevent issues during the mortgage loan process, whether for an equity buy-out or a new purchase loan.
Integrating Divorce Mortgage Planning
Why Integrate Divorce Mortgage Planning?
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process helps set the stage for successful mortgage financing. Divorce Mortgage Planning combines strategies and solutions, incorporating necessary details into an executable settlement agreement for closure and peace of mind.
Benefits of Working with a CDLP®:
- Expert Guidance: CDLPs® offer specialized knowledge in divorce mortgage planning.
- Strategic Solutions: CDLPs® identify potential conflicts and provide solutions.
- Collaboration: CDLPs® work directly with the divorce team, understanding the intersection of family law, financial and tax planning, real property, and mortgage planning.
Conclusion
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process ensures a smooth transition and successful mortgage financing. Their expertise and strategic planning can help divorcing homeowners navigate complex financial landscapes, leading to better outcomes for all parties involved.
How are you integrating divorce mortgage planning into your case management?
Contact a Certified Divorce Lending Professional (CDLP®) to explore your options and ensure a successful mortgage financing strategy during divorce.
This is for informational purposes only and not to provide legal or tax advice. You should contact an attorney or tax professional for 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.
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