Valuation and Refinancing of the Marital Residence

Over the years, I have seen several approaches used by divorcing couples to value the marital residence for their settlement. Listed in order of precision and reliability:

• Arbitrary agreement
• Zillow/Trulia estimates
• County tax assessor’s value
• Realtor Comparative Market Analysis (CMA)
• Appraisal obtained from a licensed appraiser

The purpose of this article is not to assess the strengths and weaknesses of the above methodologies. Rather, if the ultimate outcome of the divorce is for one spouse to retain and refinance the marital residence (“grantee spouse”), then it is highly recommended to start the refinance process concurrently with the divorce timeline and use the lender’s appraisal in finalizing the settlement terms.

Five Important Reasons to Start the Mortgage Refinance While the Divorce is in Process

1. To determine, up front, if the grantee spouse can actually obtain the new mortgage. So many times, I see the “must refinance” requirement in the decree without ANY pre-qualification whatsoever. If the spouse cannot qualify, wouldn’t it make sense to know, so the parties are not just going through the motions and end up having to sell the home six or twelve months later? If the spouse does not qualify now, but could, given a game plan and time (e.g., building employment history for a stay-at-home mom or repairing credit), the settlement could be drafted with an appropriate performance deadline.

2. To avoid valuation issues (low appraisals) later, which could render the refinance undoable. No matter what method is used for the settlement, if there is a         subsequent refinance to be done, the only valuation method that is acceptable to the lender/investor is the appraisal ordered by the mortgage company. PERIOD. Here is a real-life example of a client who came to me after the divorce was final:

Grantee spouse obtained an appraisal for $260,000. Grantor spouse, not believing the valuation and wanting to maximize the value to receive more proceeds, obtained another appraisal for $300,000. They agreed to meet in the middle, at $280,000. The payoff on the mortgage was $200,000. The plan was to do a cash-out refinance at $224,000 (80% of the agreed upon “value”), rolling in $4,000 of closing costs to the new loan and paying a “buy-out” to the grantor spouse of $20,000. All the numbers worked great. Except when our mortgage appraisal came back at $265,000. As you can see in the table below, the available proceeds came up $12,000 short, based on the mortgage appraisal.

This scenario created much difficulty for the grantee spouse. He didn’t have the liquid assets to come up with the shortage. And who wants to go back to court to modify? In this case, an Owelty refinance would probably have been a better solution. Had the appraisal been completed before the divorce was final, it would have been a simple change to make.

3. To shorten the waiting time for the grantor spouse to receive his/her funds from the refinance. Using a concurrent timeline with the divorce process, we typically have refinance proceeds to the grantor spouse within one to two weeks after the prove up.

4. To make sure the refinance language in the divorce decree is appropriate for the client’s circumstances. For example, should it be an Owelty or a cash-out refinance? Numerous factors can affect which type of refinance is best for the client’s situation, such as credit score, equity in the home, has the home equity been borrowed against previously, has the house been listed for sale in the last six months, etc.

5. To lower the odds of self-sabotage by either party, whether intentional or not. I will never forget the procrastinating client who was referred to me by her attorney SEVERAL months earlier. When she finally reached out to me, everything looked perfect, until I pulled her credit report. Unbeknownst to her, a recent missed payment by her ex (on the joint auto loan he was assigned in the decree) tanked her credit scores, and she was not able to refinance. Had she initiated the process earlier, this would have been avoided.

How Does the Mortgage Appraisal Timing Work?

Typically, a mortgage appraisal is good for 120 days. If market values are deteriorating, as was the case during the real estate meltdown of 2008-2012, you may see some lenders requiring updating and recertification after 90 days.

It is important to assess how long the divorce process is going to take. Will it be 60 days or six months? We don’t want to order the appraisal too soon in the process, but we definitely want our attorney/client to have the information as soon as appropriate if it is needed for mediation and/or to finalize the settlement figures. I have found that if I order the appraisal 30-45 days before the anticipated prove up, that is enough time to have the information available to the parties, as well as give us some reasonable float time in case the process takes longer than expected.

One More Thing: Pay Attention to THIS in Case of “Dueling” Appraisals

There are several different report formats used by appraisers. They all have different scopes and intended uses. The main concern of most attorneys when they order an appraisal is the final value and how it will affect their case. However, if you find yourself in the position of going to court over competing appraisals, the actual appraisal form may have an impact on the outcome of your hearing.

By far, the most common form used is the Uniform Residential Appraisal Report (URAR) 1004 form. This is the “go to” form used by appraisers and, unless

otherwise specified, will likely be the report you receive. Technically, however, this report format is not valid for court purposes. If you read the fine print, you will note that the intended use of a URAR 1004 is “for the lender/client to evaluate the property that is the subject of the appraisal for a mortgage finance transaction.”

So, in the future (if you are not already doing so), make sure you order a General Purpose Appraisal Report (GPAR) if you are going to court. And, if opposing counsel submits a URAR, you may have grounds to argue the admissibility of their report because its intended use is not acceptable.