Refinancing Your Separate Property Home – Avoid These Pitfalls
If you are married and own a separate property home in California, maintaining your sole right to your house can get complicated, especially if you decide to refinance it. That’s because the lender, before approving your mortgage, may consider both yours and your spouse’s incomes in determining whether or not to refinance your home. Unless you have a premarital agreement, earned income is community property. If the lender looks at earned income to secure the loan, the proceeds of the loan are going to be conserved community property. What that means is, unless you and your spouse have decided otherwise in writing through a prenuptial or postnuptial agreement, the loan, as well as the obligation to repay it, belongs to you and your spouse. As the loan is paid off, a portion of your home’s equity can become your spouse’s as a result.
Here are some refinance pitfalls to watch out for:
Pitfall #1 – The lender may require that you add your spouse to the title of the property before you can get a new mortgage. If you add your spouse’s name on the deed of your home, however, you are giving him or her 50% ownership rights. It doesn’t matter that you added your spouse’s name as a “formality” required by the lender. Your previously separate property now belongs 50% to your spouse, which may not be what you want.
Pitfall #2 – If the loan is considered community property, any amount that is paid to cover the principal of the loan will belong to the community (both your and your spouse). As a result, a portion of your home’s equity will belong to your spouse.
Pitfall #3 – If your house increases in value over time (which is likely in the state of California), your spouse may be entitled to a portion of your home’s increase in value. This will impact your ability to pass your home on to your children or others, as you wish.
How to remedy this situation?
Find a different lender – If your current lender requires that you add your spouse to your home’s title in order to refinance it, you should find different lender. A mortgage broker can be helpful in locating a lender and mortgage that will work for you.
Get a prenuptial or postnuptial agreement – You can indicate in a prenuptial or postnuptial agreement that you want to always treat your home as your separate property, even if you refinance it and use your post-marital income to pay down the mortgage. A prenuptial agreement is a contract that describes the ownership and distribution of a couple’s assets and debts, spousal support, community contributions to separate property and other financial matters. A postnuptial agreement is similar to a prenuptial agreement, but it is created after the couple has married.
If you are married or getting married and want to continue to own separate property, please contact our office for a consultation. If you desire a prenuptial or postnuptial agreement, we can draft an appropriate document.
Attorney Christina Sherman is a Marin County CA family law attorney and Certified Family Law Specialist, specializing in divorce, child custody and support, marital contracts and other family law issues.
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