Mortgage Refinance Effect on Homestead Property Protection from Creditors

Florida is well known for its beaches, humid climate, alligators and …broad homestead protection laws. A homestead is defined as an individual’s house and adjoining land designated by the owner as their primary residence. In order to qualify for homestead protection, a homeowner must submit an application to their county’s tax assessor’s office certifying (among other things) that: (1) the home is their primary residence, (2) the homeowner is a permanent Florida resident, and (3) that the homeowner owns the relevant property. Under Florida’s Constitution Article 10 Section 4, an individual’s homestead is exempt from liens imposed by most creditors. However, the Constitution permits a narrow class of creditors to bypass homestead protection and successfully levy onto homestead property. These creditors include tax and assessment lienors, mortgagees whom the homeowner contracted with to finance the purchase of their home, and mechanic’s lienors (laborers who have performed work on the property).

In many states, when a homeowner refinances their mortgage, this causes them to lose homestead protection status. In order to continue receiving homestead protection, the homeowner must re-file for homestead protection. Conversely, in Florida, the general rule is that an individual does not need to re-file for homestead protection after refinancing their mortgage to maintain protection. However, it is still important for a homeowner to carefully review the terms of their refinance. While rare, some refinance companies include provisions that will eliminate a borrower’s homestead protection status. If so, the homeowner will need to re-file to remain protected.

In the unlikely scenario a homeowner’s refinance company does include a homestead elimination provision, another option is for the homeowner to request that their refinance company subordinate their existing homestead. By doing so, their original homestead exemption transfers to the new mortgage without the need for re-filing. Additionally, refinance companies commonly request an executed “Affidavit of Occupancy.” This document serves as a written promise from the homeowner that they intend to occupy the property.

Another common trap an individual will sometimes fall into is refinancing their mortgage with unrealistic payment obligations for the purpose of making payments to creditors who cannot pierce homestead protection laws. While most creditors fall into this category, refinance companies do not and can, and likely will, foreclose upon encumbered property in the event a borrower defaults. Before refinancing, a prospective borrower should involve a lawyer who is knowledgeable about homestead law and work closely with them. A lawyer can assist in understanding which creditors can and which cannot levy against homestead property. A lawyer can also assist in reviewing the terms of refinance contracts to ensure that a borrower’s homestead protection is not waived. This will lead a prospective borrower to make a more informed decision and feel more comfortable prior to structuring their refinance.

This article is for general information only and is not intended as and does not constitute legal advice or solicitation of a prospective client. It should not be relied on for legal advice in any particular factual circumstance.