How to Refinance With Quit Claim Deeds

When property changes hands, it’s important that the previous owner releases his claim on it. A quitclaim deed is a legal document that “quits” the previous owner’s claim on the property. To refinance with a quitclaim deed, you’ll first need to make sure you qualify for the new loan, and then you’ll need to file the paperwork and work with your lender to schedule a closing.

A quitclaim deed is a legal document that has nothing to do with your financial obligations on the house. In other words, if you’re going through a divorce and you want to remove yourself from liability, the quitclaim deed is only the first part of the process. Your soon-to-be ex will need to refinance the house in her name, which involves going through the same loan approval process you went through as a couple.

Divorce isn’t the only situation where a quitclaim deed is used. Your parent may be passing her home to you, for instance, and the quitclaim deed will remove her interest in the property so that you can take it over. You’ll still need to refinance the home in order to put the mortgage in your name. Otherwise, she’ll be ultimately responsible for making payments each month.

In a situation where two people are on the mortgage but only one is staying, such as a divorce, refinancing can be the best option. This gives the remaining party the chance to potentially lock in a lower monthly payment, particularly if only part of the original loan amount remains to be paid. You’ll be refinancing for the remainder of the mortgage, not the full amount paid when you purchased the house.

Refinancing a mortgage into one person’s name, though, can be challenging. You’ll need to qualify for the payments with your own income, which typically will need to be three times your living expenses. If you can’t qualify, selling the home may be the only option, if your mortgage company won’t let you transfer the original mortgage to only your name.

Under Internal Revenue Service rules, things can get tricky if you’re passing a home from one person to another. You can give up to $15,000 during the tax year without the other party paying taxes on the amount, but chances are your home is worth more than $15,000. However, if you’re doing a quitclaim deed refinance, you’re buying the home, not getting it for free, so the gift tax exclusion shouldn’t matter.

If the transfer is between two divorcing spouses, typically the transaction will be nontaxable. But if you split the home and sell it, you may face capital gains tax. You can each exclude up to $250,000 in capital gains on the sale of your home, so unless your home has appreciated an extraordinary amount during your time there, you’ll probably be safe.

Before you use a quitclaim deed to transfer your home to someone else, check your paperwork to ensure there’s no due on sale clause in your mortgage contract. If such a clause exists, that means the remainder due on the mortgage will be payable when the house is sold. With a quitclaim deed, you aren’t selling the house, but if the person remaining in the home doesn’t refinance and instead takes over the mortgage, that due on sale clause could become a problem.

The issue arises if the person moving into the home agrees to pay the original homeowner’s mortgage without refinancing. You’re counting on that person to make those payments and if he doesn’t, the balance of your loan may come suddenly due. If you’re using a quitclaim deed to refinance the home, though, the old mortgage will be replaced with the new mortgage.