Typically, one of, if not the biggest marital assets is the marital home, right? The two most common ways to deal with the marital home is for one party to retain the home and pay the other party their share of the equity by refinancing the current mortgage or the home is sold and the parties split the net proceeds.
Let’s first look at the Equity Buy-Out. The Equity Buy-Out can be an animal in and of itself and take on a whole bunch of twists and turns that can cause issues complying with court orders.
The name, Equity Buy-Out, confuses some people into thinking they have to purchase the house from the other spouse. This isn’t true, an Equity Buy-Out is actually handled as a refinance loan not a purchase loan. Now, there are two types of refinances we need to consider. Just because the court orders one party to buy the equity out of the other party, that doesn’t dictate the type of refinance category it will fall under and each one has its own limitations and requirements to be met.
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?
Obviously, our goal would be to classify the refinance as a rate and term, but there are specific requirements that must be addressed in the divorce settlement agreement to make that happen. This goes back to the court-ordered assignment of debt discussed and the verbiage used. Not only does wording in the settlement agreement affect how the debt is omitted from the non-paying spouse’s liabilities, but it will also directly impact the equity buy-out and the classification of the refinance.
In order for an equity buyout to be classified as a rate/term refinance it must meet the following requirements:
The equity buyout must be addressed in the homestead or real estate section of the marital settlement agreement – basically meaning it must be addressed independently. It may not be included in an addendum that identifies all marital assets and the equity distribution absorbed into the total division of the marital estate.
Absolutely no cashback is allowed to the borrower for debt consolidation, etc. Literally, not one penny can be due to the borrower at closing – even if it is the result of overestimated fees.
The borrowing spouse must have been on title for the previous 12 months. This is a key factor if for example the mortgage and title were held in the husband’s name and the wife was awarded the marital home and needs to refinance the home. Even though the court order makes her a Successor of Interest which then allows her to refinance the home even if she isn’t on the current mortgage, again the court can’t dictate which category of refinancing is applicable. So, this then becomes an important question during discovery.
Now we need to address the actual equity buy out order. This is another area that can be distinct to each case. Typically, the dollar amount of the equity share to be paid is written as a % of the appraised value. Other times it is written as a specific dollar amount. And sometimes, it is written as a combination – Frank is to receive 50% of the equity in the marital home or no less than $50,000. When a specific dollar amount is referenced rather than a % of equity, it also can cause some specific issues. For example, the divorcing couple may have an appraisal done on the marital home prior to starting the application with a divorce lending professional. They come up with an equity amount of $50,000 due to the husband based on the appraised value. Then, when the lender orders the lender’s appraisal during the refinance process, the value comes in lower than the original appraisal. The lender cannot use the original appraisal, they must use their independent lender owned appraisal. This can cause issues when the loan to values are exceeded, etc. Loan to value meaning the mortgage to value ratio.
Another element to consider is a realistic time frame for refinancing. Going back to our previous discussion of the various types of income, division of debt, etc.
Now, what if the marital home is sold and one or both divorcing parties are planning on purchasing new homes? Obviously, if neither were able to qualify for mortgage financing because certain things were not addressed before the divorce was final, it isn’t going to cause further litigation or issues within the final divorce settlement agreement, but that shouldn’t mean that divorce professionals we shouldn’t take into consideration their future plans and address all of the issues we’ve talked about today? We want to make sure that both parties are set up for success post-decree. Divorce is a family in crisis. The most intimate thing in their life has failed. They need someone to throw them a lifeline even if they don’t realize it.
Net Proceeds from the Refinance or Sale of the Marital Home
There is one factor that should not be overlooked whether refinancing or selling the marital home and that is addressing how any escrow or overpayment refunds from the current lender are to be shared. If the mortgage is held jointly or only in the name of one spouse, it doesn’t matter how the settlement agreement disposes of the marital home, the current lender will issue a refund check in the name of the borrower or borrowers if it’s a jointly held mortgage. It needs to be addressed how this refund will be split or who gets it.
Summary: Mortgage financing can become very complicated during and after a divorce. The mere ability to read underwriting guidelines will not suffice and required a divorce lending professional on the professional divorce team. Having a solid understanding of how connected mortgage financing can be to the legal and tax aspects of divorce is not an exaggeration of the duties or role of a mortgage professional involved in a divorce case.
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.
For more information on mortgage lending, contact us today!