Generally speaking, the largest assets to be divided in a divorce matter are the retirement accounts and the family residence. Whether one spouse is going to buy the other spouse out of their interest in the house or the house is going to be sold, the parties to the divorce need to know the true amount of equity. That information is generally required to create a “balance sheet,” ideally to divide the estate equally between husband and wife.
Most people think determining equity is easy. All you have to do is obtain the value of the home, whether by agreement or appraisal, and then subtract the mortgage balance from the agreed upon value of the property – right? Wrong! There are many factors that come into play in determining equity. For example, there may be a tax lien or unpaid dues to a homeowners association. There could be outstanding property taxes or recorded judgments. Also, something to consider is whether or not the current mortgage was the result of a loan modification.
With a loan modification, quite often there may be an outstanding amount due that’s not included in the mortgage balance. Many people think that when they obtain their loan modification, a portion of the mortgage balance is “forgiven.” Although in some rare instances that may be true, what we’re finding more often is there’s a lien against the property for the “forgiven amount” to be paid at a later date. Another scenario I’ve seen is the forgiven amount may be forgiven but only after a certain specified time, along with the consistency of timely payments during that specified time.
So, how do you determine the true equity in a home? A detailed title report is needed and a request from the mortgage company for a loan payoff. The loan payoff, along with any liens against the property, should give you a clear picture of the true equity in the home.
Also, it’s important to remember that if both parties are borrowers on the loan, it will need to be refinanced to take the name of the person whose interest is being purchased off the loan. Would you want liability on property you no longer have control over? Certainly not.
The lesson to be learned here is do not make assumptions when determining equity in your home. Do your homework.
Pamela Edwards-Swift is a Certified Family Law Specialist