The Impact of Changes in the Mortgage Industry for Divorcing Borrowers
When a divorce involves refinancing the marital home, divorcing borrowers typically are looking to pull equity out of the home in order to buy-out the other spouse’s equity ownership. Although the divorce settlement agreement may outline the details of the transfer of ownership, it does not determine what type of financing is available for the divorcing borrower.
The two types of refinances are either a Rate/Term refinance or a cash-out refinance. Rate/Term refinances typically have better terms with regards to lower interest rates and access to more equity. A cash-out mortgage, on the other hand, may carry a higher interest rate and typically only allows the borrower to access up to 80% of the home’s value, which can present a problem when the goal for the refinance is to actually access the equity, right?
The mortgage industry is currently shifting once again and cash-out refinances seem to be drying up as banks and mortgage lenders tighten underwriting standards to cover the risk of millions of borrowers seek-ing forbearance on their home loans. Many lenders and agencies have implemented a pricing adjustment on cash-out refinances equivalent to 5% of the loan amount while many have eliminated cash-out refinancing all together with loan-to-value ratios higher than 80%. This pricing adjustment is equivalent to $25,000 on a $500,000 mortgage.
In 2019, roughly 13% of homeowners with loans owned by Freddie Mac took out roughly $91 billion through cash-out refinances, according to Freddie data. Cash-out refis hit a peak in 2006, when Freddie borrowers alone tapped $320.5 billion in home equity.
How does this affect divorcing borrowers needing to access the home’s equity in order to settle with their soon-to-be ex? The divorce settlement agreement needs to be structured in such a way that the divorcing borrower can refinance as a Rate/Term – equity buy-out. The loan structure will allow the divorcing borrower to access the equity in the home without the higher pricing adjustment or even the ability to refinance at all.
There are specific requirements that the divorcing borrower needs to meet; however, in order for the refinance to be structured as a Rate/Term equity buy-out. There may be title seasoning issues, specific wording in the divorce settlement agreement among other issues.
Obtain an Equity Buy Out Preapproval
Obtaining mortgage preapproval to purchase a new home has been common practice for many years. A preapproval shows the home seller that the buyer has the financial strength to obtain mortgage financing to successfully complete the purchase transaction. The mortgage purchase preapproval is one of the first steps required for homebuyers and it should be one of the first steps for a divorcing spouse before agreeing to refinance the marital home.
An Equity Buy Out Preapproval should also be required by the spouse retaining the marital home if new mortgage financing is required. A refinance due to a divorce is required to remove the vacating spouse from the current mortgage or when the in-spouse needs to buy the equity ownership from the out-spouse in cash form.
• An Equity Buy Out Preapproval allows the Certified Divorce Lending Professional (CDLP) the ability to account for all income requirements, joint and individual debt, and assets needed to successfully provide mortgage financing.
• An Equity Buy Out Preapproval can eliminate the fear of selling the home should mortgage financing not be obtainable by the in-spouse if ordered in the divorce settlement agreement.
• An Equity Buy Out Preapproval can prevent the need to return to litigation due to the inability to fulfill the requirements of the divorce settlement agreement.
• An Equity Buy Out Preapproval will provide all parties with a sense of confidence that there will be no issues obtaining mortgage financing once the divorce is final and alleviate any concerns of failure to execute.
Involve a Certified Divorce Lending Professional (CDLP) in the early settlement stages and obtain a complete analysis of the mortgage financing requirements. This essential and necessary step can help provide a smooth transaction post-divorce and remove unnecessary burdens and frustrations.
Now more than ever, it is important to have a Certified Divorce Lending Professional (CDLP™) on your professional divorce team. A CDLP™ will not only understand these major changes within the mortgage industry but the impact they may play during the divorce process and obtaining mortgage financing.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
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