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Quitclaim Deeds and Refinancing
Quitclaim Deed Definition: A quitclaim deed is a document most commonly associated with the dissolution of a joint mortgage. Particularly with residential mortgages, the most frequent use of the quitclaim deed happens during the divorce process. As part of resolving the property portion of a divorce, generally one party or the other will be awarded the house and the equity in it, as one party usually wants to retain the residence. The other party signs the quitclaim deed to relinquish interest in the property. There are some important things to consider before you sign that paperwork, though.
First, when you put your signature on a quitclaim deed, you surrender any and all rights that you might have in that property. If you and your wife own property together, you currently have equal rights to it. If you sold the house, you would be entitled to 50 percent of the proceeds, and you would have the right to refuse to the sale. However, once you sign that quitclaim deed, you are giving her complete control over that property. If she sells the house, you do not get any of the proceeds and have no rights to it.
Second, a quitclaim deed is just about the only type of deed instrument that does not come with an implied warranty that your property claim is valid. Just because you sign one does not automatically mean that you had rights to the property to begin with. The most common cases in which this question arises occurs when title companies research a property and find other existing quitclaim deeds on file.
Third, and most importantly, when you sign a quitclaim deed, that does not mean that you automatically come off the mortgage. If you and your wife have a joint mortgage, but you sign a quitclaim deed at the point of divorce, you are still on the hook for that mortgage. Your soon-to-be ex also has to sign paperwork to get your name off the mortgage. If your ex-spouse is unwilling to get that paperwork turned in, you can use your paperwork to instigate refinancing proceedings, but that is a complex process. The combination of the quitclaim deed and the refinancing process guarantees that your name comes off the mortgage. Your credit report will no longer contain this loan, and it will no longer affect your debt to income ratio.
Finally, if you acquire a house from someone else through a quitclaim deed, you accept the property “as is.” In the case of a dissolution of a joint mortgage, that is self-explanatory. However, quitclaim deeds can also be used to transfer property from party to another to settle a debt, even though the second party was not initially on the deed. If you get property this way, there is no implication of warranty. This means that you need to order a thorough inspection of the home before accepting a quitclaim deed as a resolution.
The Legal Skinny on Quit Claims
Most of us know how the mortgage agreement works. You apply for a loan from a bank or other lender, and you get funding to bridge the gap between your down payment and the purchase price of your new home. You make your payments every month, and you keep up with property taxes and insurance premiums. If you don’t, then you can be considered to have defaulted on the mortgage. There are times when situations arise that make it impossible for you to keep making those payments. In many cases, that leads to foreclosure, a process that ends up shredding your credit score.
One alternative to the foreclosure process is for you to offer a “quit claim” to the lender. This involves the lender agreeing to cancel the debt on your mortgage, and you agree to relinquish the property to the lender. If you have built up significant equity, this might not be in your best interests (selling the house is often preferable), but if you are fairly early in the mortgage process and your payments so far have mostly covered interest, then this could be the right solution for you.
A quit claim doesn’t take nearly as much time, and it doesn’t cost nearly as much money as foreclosure. Lenders may agree because a foreclosure can last as long as a year, and the legal fees are significantly lower. Also, such costs as appraisals and service costs don’t apply. The lender is less likely to agree, though, if you have zero equity because of other mortgages or liens on the property that you have built up. Those liens would transfer with the property to the lender, so it is important to satisfy any other liens before offering a quit claim. You can check with the registry in your province to make sure that there are no other encumbrances on the property.
Another benefit of a quit claim is that, in most cases, a bank cannot agree to take your property and then sue you for the money remaining. This is true in the case of a conventional mortgage (where the loan funded less than 75% of the home’s value). However, if you have a CHMC-insured mortgage where your down payment was less than 25%, then the bank can still sue you for the balance even if they take your property. In this situation, you would want to consult an attorney for your next step.
Should the lender accept your quit claim offer, you sign a “Transfer” document that releases title to the lender. Both you and the lender sign the “Quit Claim,” which is the mutual agreement to transfer the property and cancel the debt. It is important for the document to state explicitly that the debt is no longer in force. Also, the Quit Claim should have an inventory of the items that you can take with you when you move out, such as appliances, furnishings and other items. Generally, you are required to move out immediately when you sign the quit claim.
If you are considering a quit claim for property other than residential, such as leaded residential property, you may end up owing GST taxes in addition to income taxes on the transfer. You’ll want to talk to an attorney in this case.
Quit claims are not as devastating to your credit score as a foreclosure, but some creditors can tell from your credit score that you signed a quit claim, and you may have less access to financing in the future. However, the impact will be less severe. In any event, talking to an attorney about your own situation may be the best bet.
If you are considering acquiring property through a quitclaim deed or relinquishing your own claim to property in a similar way, get in touch with one of the mortgage experts at Amansad Financial. We have walked hundreds of clients through the process to ensure that they receive all of their rights and entitlements before execution of the deed.