Divorce housing scenarios – Retaining the marital home
Part 2 of E5’s divorce series covers one spouse retaining the marital home. This Divorce Mortgage Guidance series focuses on navigating the credit, income, and home financing process during divorce. There are many living scenarios after divorce. Both partners may opt to sell the marital home and go find new homes to buy or rent. The marital home could be retained as a rental. This article covers one spouse choosing to stay in and refinance the marital house while buying out the exiting spouse’s equity.
Refinancing the existing marital house
Regardless of which spouse is refinancing, they need to qualify for the loan on their own. If there was a joint mortgage, the refinance must be completed to release the exiting spouse from financial responsibility. Until the refinance is funded, the mortgage will still show as a liability on the non-resident spouse’s credit and potentially impact their creditworthiness.
In addition to the refinance, the title of the house also needs to be transferred to the retaining spouse’s name. Even if only one spouse was on the mortgage but both are on title, a quitclaim deed can be used to remove the exiting spouse. Having the title reflect the refinance is very important. If not executed, the exiting spouse could still benefit from the equity or future sale.
What if the spouse retaining the home needs to “buy out” their ex-partner?
This is common and can be done with a “cash-out” refinance. Borrowing against some of the equity in the house can provide funds to pay the exiting spouse their share. Keep in mind most cash-out refinance loan options have a maximum loan-to-value limit of 80%. If a house is worth $500,000, the loan amount needs to be $400,000 or less. If more funds are needed, a Home Equity Line of Credit (HELOC) might be an option after the primary refinance is complete.
Determining the Equity
Most loans require an appraisal. An independent third party will determine the appraised value as part of the loan process. If the couple is not in agreement, then they can both have an appraisal done and take the average. That value, minus any mortgage and HELOC debt, is the equity. NOTE: For this calculation, an accurate payoff statement needs to be used, NOT the mortgage balance from the most recent mortgage statement. The cost of refinancing tends to be less than the cost of selling. Consider factoring these savings, like title and realtor fees, into the equity calculation as well.
Prepare yourself leading up to a separation or divorce, and consult a licensed loan officer in addition to any legal advice. E5 Home Loans has loan officers trained in Divorce Mortgage Guidance. Plus, E5 shops the best loan products across many lenders and we don’t charge a bunch of crazy fees. Contact us today.
E5 Home Loans Divorce Mortgage Guidance Series
Part 1 – Divorce – Where Will You Live?
Part 3 – Divorce Housing Scenarios – Selling the Marital Home