In a situation of a divorce there is typically a requirement of the settlement of the family home or other jointly owned property. This settlement is typically handled by the sale of the homes or one spouse buying out the other spouse’s financial share of the properties. Here's how it works:
Asset Valuation: During the divorce process, all marital assets are identified and valued. This includes real estate, bank accounts, investments, retirement accounts, and any other jointly owned property or financial assets. An independent appraiser is quite often hired to provide an independent opinion of value of each property.
Negotiation: Spouses and their attorneys or mediators negotiate the division of these assets. In some cases, one spouse may want to retain ownership of a particular asset, such as the family home, while the other spouse may prefer to receive their share of the asset’s value in cash.
Buyout Agreement: If one spouse wants to keep a particular asset, they can enter into a buyout agreement with the other spouse. In the case of real estate, for example, the spouse who wants to keep the home would typically pay the other spouse their share of the home’s equity in cash. This allows one spouse to “cash out” of their ownership interest in the property.
Property Transfer: Once the cash payment is made, the spouse who is giving up their share of the asset signs over their ownership rights, and the property is transferred into the sole ownership of the other spouse.
Legal Documentation: To formalize the arrangement, legal documentation is prepared, which may include a property settlement agreement or a divorce decree specifying the terms of the buyout.
Here are some tips to keep in mind when these negotiations will require the refinance of one or more of the properties to access the equity to complete the buy-out agreement:
Quick Access to Equity: The fastest way to access equity from a residential property is through Cross Country’s Equity Express Program. This is a first, second or third mortgage loan that does not require an appraisal, the application takes approximately 5 minutes, and the loan can be funded in as little as 5 business days. The program is available in all states except, DE, KY, MD, NY, SC, TX, and WV. This loan program will allow the homeowner to quickly gain access to the equity within a home without giving up a potentially low interest rate first mortgage. A quick email to our team with the address of the property that you are interested in refinancing and a link can be sent out to you and you’re on your way.
In some situations, a second on third position mortgage does not work, and part of the agreement requires the removal of a spouse’s name on the loan and title of the property. Here are some tips on how to approach a traditional refinance to secure a lower interest rate in the process. In any interest rate market, a cash out refinance is going to have a higher interest rate than that of a purchase or rate and term refinance. Here are some tips on how to avoid a higher interest rate in the process of cashing out a spouse.
Fannie Mae: A mortgage loan that is underwritten to Fannie Mae guidelines will consider the transaction rate and term, not cash out if the following guidelines are met. The property must have been owned jointly for at least 12 months. All parties must sign a written agreement that states the terms of the property transfer and proposed disposition with the proceeds of the refinance transaction. Borrower who acquires sole ownership of the property may not receive any proceeds from the refinancing.
Freddie Mac: A mortgage loan that is underwritten to Freddie Mac requirements will consider this transaction as cash out, you would want to avoid any investor that imposed Freddie Mac guidelines on a transaction to cash out a spouse to avoid a higher interest rate.
FHA: When the purpose of the new mortgage is to refinance an existing Mortgage to buy out an existing title holders’ equity, the specified equity to be paid is considered- property related indebtedness and eligible to be included in the new mortgage calculation. The borrower will need to provide the divorce decree, settlement agreement or other legally enforceable equity agreement awarded to the title holder.
VA: The VA loan program does not have any rate and term refinance transactions. Any non-Streamline VA transaction is considered cash out, there is not a higher interest rate for cash out as they are all considered cash out.
Jumbo & Non-QM: There are many Jumbo loan programs as well as Non-QM loan programs which refers to alternative income loan programs that will follow Fannie Mae guidelines and requirements to classify a transaction used to take equity out of a home to pay off a spouse as rate and term to avoid a higher interest rate of a cash out refinance.
Rate/Term Refinance Matrix - Fannie Mae
| Transaction Type | Min FICO | # of Units | Max LTV/CLTV | Max DTI |
|---|---|---|---|---|
| Rate/Term Refinance | 620 | 1 Unit | 95% | 50% |
| 2 Units | 85% |
Approaching financing to settle real estate equity in a divorce is different than approaching a traditional mortgage transaction. The transaction not only requires a certain amount of discretion, but it very much requires the experience of working with a lender that has experience of these types of transactions. Many loan officers are not aware of the nuances related to these types of loans and you can end up with a higher interest rate.
Our team has experience working with people who are required to buy out the interest of another owner because of a divorce settlement of dissolution of a domestic partnership.
The Importance of Working with a Loan Officer that Specializes in Divorce Lending
Real estate always makes a pending divorce even more complicated, and many loan officers do not possess the experience and expertise needed to handle real estate transactions involving shared debts. This lack of experience can result in increased costs and expensive delays for your clients.
We specialize in providing exceptional home loan purchase and refinance solutions to your clients currently navigating the challenges of a pending divorce or separation. Our dedicated team has extensive experience in assisting clients who are required to buy out the interests of another party due to a divorce settlement or the dissolution of a domestic partnership and understand the nuances of these transactions and are committed to securing the most favorable terms for our clients during this challenging time.
Learn about the latest updated in divorce lending guidelines and how our expertise and reliable strategies can help win loan approval before a divorce is finalized:
- Cash Out During a Divorce/Separation
- Purchase a Home During a Divorce/Separation
- Quick Access to Equity During a Divorce/Separation
- Loan Assumption During a Divorce/Separation
- Divorce Support Income for Loan Qualification
- Improving Credit Scores and Excluding Liabilities During a Divorce/Separation
