This post from George Souto hold highly valuable information that might just make you the immediate best friend to your clients for life.
There are major property issues when a marriage ends in divorce. The same is true when two people who are not married purchase a property together and then decide to go their separate ways. One of the issues that pops up all the time is how to handle the distribution of the equity in the property. In the case of a divorce most of the time the courts decide on how that will be handled. When neither spouse wants to keep the house the course of action is simple, they sell the house and split the equity. But it is not so simple when one wants to keep the house and has to give the other spouse their share of the equity in the property.
The same holds true for two unmarried people, when their relationship comes to an end. They are faced with the same two options, but in their case it is a little more complicated because there is no court order to dictate how the property will be divided. Matters become further complicated when there is not enough equity in the property to do a normal Cash-Out Refinance. Fannie Mae requires 80% Loan-To-Value (LTV), and FHA require 85% Loan-To-Value (LTV) to be retained in the property after the refinance in order to do a Cash Out Refinance.
The LTV Cash Out Refinance requirement often creates a dilemma for both spouses or co-borrowers when the property does not have enough equity to meet the Cash Out Refinance LTV requirements, and neither spouse or co-borrower has enough funds to buy out the other. When this happens they are left with no choice but to sell the property. However FHA and Fannie Mae have a refinance option for these situations, which is not well know.
No Cash Out Refinance - Refinancing To Buy Out Title-Holder Equity: Under this option the spouse or co-borrower retaining the property can refinance the property up to 97.5% LTV in stead of 85% LTV. This is a huge advantage, especially when a property has declined in value or has not gained enough equity for a normal FHA Cash Out Refinance.
When the purpose of the refinance to purchase the equity of the other spouse or co-borrower, FHA will require the remaining title-holder of the new refinance loan to buy out an other title holder's equity, if the equity to be paid is:
- Considered property-related indebtedness, and eligible to be included in the new mortgage calculation.
- The title holder who will retain the property must obtain a divorce decree, settlement agreement, or other legally enforceable equity agreement to document the equity awarded to the other title holder.
- Title-holder buying out the other title-holder's equity may not receive any of the proceeds from the refinancing. Also the title-holder buying out the other title-holder's equity must be able to qualify for the new refinance with just their own income, and meet all other FHA No Cash Out Refinance Guidelines.
Limited Cash-Out Refinance Transactions: Refinances To Buy Out An Owner’s Interest:
Under this Fannie Mae option the spouse or co-borrower retaining the property can refinance the property up to 95% LTV in stead of 80% LTV. Again this is a huge advantage when a property has declined in value or has not gained enough equity for a normal Fannie Mae Cash Out Refinance.
In order to qualify for this Fannie Mae option the spouse or co-borrower retaining the property MUST meet the following:
- A transaction that requires one title-holder to buy out the equity of another owner (as in the case of a divorce settlement or dissolution of a domestic partnership) is considered a limited Cash-Out Refinance if the property was jointly owned for at least 12 months before the date of the mortgage application.
- Both parties must sign a written agreement which states the terms of how the property is to be transfer, the purpose of the property transfer, and use of funds from the refinance.
- Except in the case of recent inheritance of the subject property, documentation must be provided to indicate the property was jointly owned by both parties for at least 12 months before the date of the refinance application.
- Title-holder buying out the other title-holder's equity may not receive any of the proceeds from the refinance. The title-holder buying out the other party’s equity must also be able to qualify for the mortgage of the new refinance with just their own income, and meet all other Fannie Mae's Limited Cash Out Refinance Guidelines.
I hope this helps those who are reading this who may find themselves in this situation, or if you are a Realtor, to help advise your Clients on what to do. As always it is OK to give some initial advice, but make sure you contact a knowledge Loan Originator to provide further guidance, and guide through the process.
Info about the author:
George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org