Divorce is messy as it is. Throw in the recent changes within the mortgage industry and it may get even messier. Just mention that just the name, Equity Buy-Out, and it can get even more confusing!
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 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 because just because the court orders one party to buy the equity out of the other party, that doesn’t dictate the type of refinancing category it will fall under and each one has its own limitation and requirements to be met.
The Two Types of Refinances:
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 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.
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 say 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, attorney fees, 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.
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement agreement can help divorcing homeowners set the stage for a successful refinance of the marital home.
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP™) can help answer questions and provide excellent advice.
If you’d like to start the process of getting a home, come see us at the Tammi Lindley Team. We are Portland’s premier mortgage lenders, offering hundreds of mortgage products so you can pick the mortgage that matches your needs. Contact us today and start the process of owning your dream home.