Joint mortgage payment problems can stem from one of a few things. Be sure to know who owns what and what percentage of property each owner owns.
Q: I hope you can help me out with the following problem: My husband owns 50 percent of this house. The other 50 percent belongs to another couple, let’s call them the “Smiths,” who each own 25 percent.
My husband took a loan under his name and the Smiths paid the down payment. After some amount of time, my husband refinanced the house and the Smiths got their down payment back. The Smiths never paid any of the mortgage payments or utilities. My husband lived in the house and paid all the expenses associated with the property.
Now they have decided to sell the property for $380,000. The unpaid loan balance is about $200,000. The title company has asked us how to allocate the contract price between owners. Our agent insists that we should put down 25, 25, 50 percent of that sale’s price.
But in this case, my husband will receive $190,000 for his share but that amount will be enough to cover the loan. I think that we should provide final numbers: $380,000 – $200,000 = $180,000. That number would then be divided into 50 percent for my husband, or $90,000 and 50 percent for the Smiths, or $45,000 each.
Could you please explain what is the procedure of closing in the situation when one owner has a loan for a whole house and 2 others do not have any loans associated with the property?
A: We think you may not be looking at the transaction properly. The title agent needs to know who owns what. For federal income tax purposes, you also need to know the percentage of the property that each owner owns.
At the start of your question, you mentioned that you husband owns half the property. Your husband does not own the mortgage, your husband owes a debt that must be paid off to sell the home.
On a different note, we would have liked to have seen your husband written up a partnership agreement with the co-owners of the property spelling out who was going to contribute what and how everyone would be compensated on the sale of the home.
For example, how did the partners envision paying back the down payment? How did they envision that your husband would be reimbursed for the ongoing mortgage payments? Did all partners agree that the mortgage payments and real estate taxes and maintenance would be your husband’s contribution in exchange for living in the property?
Regardless of who is named on the property title, the loan is for the entire home. What typically happens is that the ownership is apportioned and after the loan to the property is paid off, the remaining funds are distributed to the owners.
On sale of the home, the first payments would go to pay off the loan of $200,000. Then, any costs of sale would be deducted from the remaining $180,000. These costs might include the broker’s commission, transfer taxes, any credits you owe the buyer, and other costs to sell and convey title of the home to the buyer.
Typically, the costs of sale could be as much as 10 percent of the sales price, which would be another $38,000. That assumes you’re paying a 6 percent sales commission, which would be $22,800 on its own.
If you take the $380,000 sales price, subtract the loan amount of about $200,000, then subtract the $38,000 in costs of sale (including the broker’s commission of $22,800), you’re left with $142,000. As a 50 percent owner, your husband would get half (or $71,000) of that amount and the Smiths would receive the other half.
It’s only fair for your husband to get the mortgage paid off, along with the costs of sale before the net proceeds are split between the owners. This is the kind of detail that would normally be written into a partnership agreement. Whenever unmarried partners purchase real estate, we always recommend a partnership agreement that spells out what happens during the course of ownership, who owns what, and what happens to the asset once the property is sold.