Breaking Up (Is Subject to Guidelines and Restrictions)
When we look at our refinance business, not a small percentage of it is driven by the scenarios where one spouse buys out the equity of the other, as stipulated in a divorce decree. Sometimes when we are presented with a divorce buyout refinance we have to educate all the parties to the transaction on how to navigate the lending guidelines that govern these situations and, as you might expect, divorce buyouts are often done in a stressful environment. So for those who may be looking to get an overview and understanding of the process, I hope that the key points below will help to reduce the friction that may already exist during this most difficult of periods in a relationship's life.
"A man in love is not complete until he is married. Then he is finished."
There are only three marital statuses on the loan application (married, unmarried and separated), and yes, you have to pick one. If any borrower is still married when he/she attempts to refinance then the application and closing must, in some way, involve the other spouse and that person's ownership rights. Refinancing at this time would not technically be considered a "buy out" because the parties are still married. If a borrower, on the other hand, is separated it can also be very complicated to complete any mortgage transaction because the final status of the divorce, the disposition of assets and the obligations of child support and alimony may not be known or enforceable. A final divorce decree is needed to dictate the rights of both spouses and their roles in relation to the buyout transaction.
"I was always a good housekeeper. Whenever I divorced I kept the house."
We, in the lending industry, can consider a buyout refinance as a "rate and term" refinance. Whoa, whoa, whoa --- I thought you were going to spare us the lender lingo, Rob. OK, in layperson's terms all we mean by this is that the loan terms will be more favorable; the loan-to-value (LTV) can go higher, the pricing will most often be better and the restrictions will be fewer. A rate and term refinance is
contrasted by a "cash out" refinance and believe it or not, there are still a great number of mortgage loan originators who will treat a true divorce buyout as a cash out refinance, much to the detriment of their clients. Now you do need to realize that in order to keep the rate/term piece in place, the lender is going to want to know that the home in question was jointly owned for at least the previous 12 months (there are instances of exception), so it is with deep regrets that any and all Britney Spears-esque marriages will not stand this test of time.
"I never hated a man enough to give him his diamonds back."
The borrower who is refinancing the home may not receive any of the proceeds of the "cash out." That is, the equity being liquidated via the refinance must go exclusively to the spouse coming off the title and/or loan, and as stipulated by the divorce decree.
"How many husbands have I had? You mean apart from my own?"
Lastly, the borrower who is not being bought out and who is retaining the home must qualify exclusively for the new loan, which will be greater in size than the existing mortgage (if one exists). A lot of confusion can swirl around this point, but know that it is possible for the borrower to add another applicant at this time. And last but not least, a refinance of this nature removes the spouse being bought out from any existing loan itself, thereby releasing that person's contractual obligation to make future loan payments.
While Zsa Zsa Gabor, in her extensive experience, was able to find humor in divorce situations, most other homeowners do not. This is precisely why an understanding of these industry standards and guidelines can help ease the stress of dividing real property in any marital settlement. We are here to consult with you and your legal counsel, if necessary, and to make breaking up a little less difficult to do.
'Till death do us part,
Robert J. Spinosa
Executive Loan Advisor
NMLS: 22343 CalBRE: 01297944
Cell: 415-367-5959 Fax: 415-366-1590
1058 Redwood Highway, Frontage Road, Mill Valley, CA 94941
RPM Mortgage, Inc. – NMLS#9472 – Licensed by the Department of Business Oversight under the Residential Mortgage Lending Act. Equal Housing Opportunity.