§ 7.05 Using Marital Funds to Pay a Premarital Mortgage or Using Separate Funds to Pay a Mortgage Loan Obtained During Marriage
| Jurisdiction | United States |
| Publication year | 2021 |
§ 7.05 Using Marital Funds to Pay a Premarital Mortgage or Using Separate Funds to Pay a Mortgage Loan Obtained During Marriage
[1]—Definition of a Credit Purchase
A "credit purchase" is one in which some or all of the purchase price is borrowed. The Funds can be borrowed from the seller or a third party.
[2]—Characterizing the Loan Proceeds
[a]—In General
When applying the inception of title,113 time of vesting,114 or the pro rata approaches to credit purchases,115 one important task is characterizing the separate or marital nature of the loan proceeds, or the promissory note, given to purchase the property in question. Some states that accept the pro rata approach appear to ignore the loan proceeds for characterization purposes.116 Most states, however, include the proceeds in the characterization analysis.117 For this reason the proceeds must be characterized as a separate or marital contribution before the property can be characterized.
[b]—The Primary Intention of the Lender Test
Some states have adopted the view that loan proceeds used to purchase property during marriage will be characterized based upon the estate the lender was primarily relying upon in extending the credit.118 The intent of the lender is determinative.119 A loan can therefore be separate property even if both spouses sign the note,120 and the loan can be marital property even if the security for the loan is only separate property.121
[c]—The Collection Rights of the Lender Test
Other community property states have adopted a rule that loan proceeds received during marriage are community property unless the creditor can only reach the separate property of the borrower to collect the debt.122 In some community property states, contract creditors of one spouse can reach community property and the obligor's separate property, absent an agreement by the creditor only to look to separate property.
[d]—The Nature of Security Provided Test
Another view characterizes loan proceeds based upon the character of the property provided as security.123 If both spouses sign the note, however, the issue becomes even more confused if separate property security is provided. Some courts have held that the additional signature renders the proceeds marital property,124 while other cases have considered the proceeds separate property despite the additional signature.125
Things get circular if the only security provided is the property being purchased with the loan proceeds. At least one court has concluded that in such a situation the loan should be characterized based upon the character of the down payment given.126
In a Virginia case, the husband repeatedly during marriage obtained loans by pledging separate property stock; he used these loans to buy realty. The Virginia court concluded that such acquisitions were his separate property.127
[e]—The Use of Proceeds Test
Still another characterization approach looks to the use of the loan proceeds.128 It is somewhat unclear, though, how a court would determine what is a "separate" use and what is a "marital" one.
[f]—The Source of Repayment Test
Another characterization approach looks to the nature of the property with which the parties intend to repay the obligation in question.129 It is unclear whether the funds actually used are determinative, or whether the crucial concern is the intention of the parties when the note was signed. At least one court has suggested that the understanding of the parties is the determinative factor.130
[g]—The Effect of a Prenuptial Agreement
If the parties have a prenuptial agreement, this could affect the court's analysis.131
[h]—The Identity of the Lender
In a South Carolina case, the wife borrowed funds from her father during marriage for a down payment on property. The court concluded this was a separate property contribution by the wife.132
[3]—The Inception of Title Approach
[a]—In General
A frequently used approach to characterize property acquired by credit purchase is the inception of title approach, sometimes referred to as the inception of right approach.133 Pursuant to this approach, the crucial concern is the character of the property transferred at the first moment in time that either spouse had a right to acquire the property.134 The property is characterized based upon the nature of the consideration given at that time only. Any later payments may give rise to a right of reimbursement.
An example may be useful. Assume prospective wife bought a house one year before the marriage for $55,000, and that the house has the same value at the time of marriage. If the spouses live in the house for twenty years and make all house payments from marital property, the house remains totally the separate property of the wife, since all contributions made at the first moment she had a right to purchase the house were separate property. Even if the house is worth $150,000 at divorce, under the inception of title view, all of the increase in value is the separate property of the wife. However, the marital estate would have a claim for reimbursement for some of the amounts contributed toward the house payments.
[i]—Credit for Down Payment
Property can be a percentage separate and a percentage marital pursuant to the inception of title approach. In order for this to occur, however, the separate and marital contributions must have been made contemporaneously at the first moment either spouse had a right to acquire the property.135 In most credit purchase situations, for example, a purchaser will either borrow the whole purchase price, or a down payment will be made and the remainder will be borrowed. Characterization of the loan proceeds therefore is vital for marital property characterization purposes. For example, if a spouse during marriage buys a house for $100,000 in his name alone, makes a down payment of $25,000 with separate property and borrows the remaining $75,000 of the purchase price, if the loan is considered marital property the house is 25% separate property and 75% marital property.136 So, for example, in a Minnesota case the parties bought a house during marriage for $248,000. The wife contributed $55,000 of her separate funds as a down payment and to pay closing costs. The court determined the house was ($55,000)/($248,000) her separate property, so if the house was worth $305,000 at divorce, she should be awarded 22.17% of that, or $67,619, as her separate property.137 In contrast, if the loan is considered separate property, the house would be totally separate property. Under this approach, the nature of any later payments is irrelevant for characterization purposes. The right of each estate to share in any appreciation is fixed by the first consideration given.
An Arkansas court applied a strange characterization approach toward a house purchased before marriage.138 Prior to marriage, the husband had inherited a 1/6th interest in a piece of realty and then, still prior to marriage, purchased the remaining 5/6th via a credit purchase. For reasons the court did not explain, the realty was treated as 1/6th separate property and 5/6th marital property.139
A New York court characterized a vacation home purchased during marriage as 100% marital property, even though the down payment was made with funds the wife had received as a gift from her mother.140 The court's reasoning is unclear, and it could be that the decision rested on the fact that the couple took title to the property jointly. In a more conventional title analysis case in the New York courts, the parties purchased a house during marriage with a 25% down payment coming out of the husband's separate estate.141 The court determined that the husband's separate estate should receive the amount of the down payment plus 25% of the increase in value of the house during marriage.
When a spouse makes a credit purchase of realty during marriage and contributes separate property as part or all of the down payment, some courts conclude that such a separate property contribution purchases an interest in the property.142 In other states, the property is marital property, but the person contributing the separate property down payment is reimbursed for the amount of the contribution.143 If the parties take title jointly, however, the separate property down payment might be considered a gift to the marital estate.144
In a Kentucky case, the parties purchased a home during marriage. The husband contributed $7500 of his separate property as a down payment, and they borrowed the remainder of the purchase price. The parties devoted time and effort during marriage improving the property. The property increased in value during marriage. The principal balance of the loan was not reduced during the marriage. The court held that the husband had the right to have his $7500 refunded to him, but that all the increase in value of the property during marriage would be presumed to be due to the parties' efforts unless the husband could show that some was due to general market forces.145
In an Ohio case, the spouses purchased a home during marriage for $142,728. They borrowed $113,047. Including closing costs, the spouses paid $34,320 from their respective separate estates. The wife paid $11,543 and the husband contributed $22,798. Because the husband's separate property contribution was approximately twice that made by the wife, the court awarded the husband 66% of the house sale proceeds and the wife 34%.146
In a New York case, the parties bought a house during marriage and borrowed part of the purchase price. The husband later advanced $54,000 of his separate funds to reduce the outstanding mortgage. The appellate court affirmed the trial court's conclusion that the husband's separate estate should be reimbursed at divorce for the $54,000 advanced.147
[b]—The Distinction Between a Credit Purchase and an Installment Purchase
For inception of title characterization purposes, in a "credit purchase," the loan is generally...
To continue reading
Request your trial