Divorce Equity Buyouts - Does It Matter Who Is On Title?

By
Mortgage and Lending with AmeriFirst Financial Inc, San Diego, CA NMLS 259027

If 2 spouses are getting divorced and one of them wishes to keep the marital home, a “Divorce Equity Buyout” is often pursued via a new individual mortgage in the name of the Spouse keeping the home (which we often refer to as the “In Spouse”).  The Spouse vacating the home is referred to as the “Out Spouse”.

So if the “In Spouse” is buying out the “Out Spouse” does it matter who is on Title when the Divorce Equity Buyout mortgage is pursued? 

In short, YES.

To understand the significance of why this dynamic matters, we must first understand that there are 2 types of residential mortgage refinance loans, which are “Rate & Term” (R/T) and “Cash Out” (C/O)

The significances between R/T and C/O are as follows:

  • Qualifying Parameters:
    • Rate & Term (R/T)
      • Allows for up to 97% Loan-to-Value (LTV) on a Conventional/Conforming loan**.  For example, if the property is worth $500,000.00, the maximum loan amount on a R/T refinance is $485,000.00.
      • Rate & Term (R/T) refinances typically only allow a maximum amount of Cash-Out of $2000.00
      • There are special provisions which allow a Divorce Equity Buyout to be treated as a R/T refinance even though more than $2000.00 of equity is accessed.  Most Lenders do not know this special provision exists.
    • Cash-Out (C/O)
      • Allows for up to 80% Loan-to-Value (LTV) on a Conventional/Conforming loan**.  For example, if the property is worth $500,000.00, the maximum loan amount on a C/O refinance is $400,000.00
      • C/O refinances allow more than $2000.00 in Cash-Out to be accessed (provided all other mortgage approval guidelines are met)
  • Pricing Adjustments:
    • Pricing Adjustments are not your friend…they typically make your mortgage quote WORSE once these adjustments are applied
      • There are Pricing Adjustments for Cash-Out refinances that are not present on Rate & Term refinances.
      • The higher the LTV, the worse the Pricing Adjustments
      • The lower the Credit Score, the worse the Pricing Adjustments
      • If someone is accessing the full maximum 80% LTV with a Credit Score between 620-639, the same interest rate on a R/T refinance may cost approximately 4 points in additional costs on a C/O loan.  For example, if the Property Value is $500,000.00 and the loan amount is $400,000.00, the additional +/- 4 points would equate to an additional +/- $16,000.00 in acquisition costs…ouch!

 

So what does any of this information have to do with who is on Title at the time of Divorce? 

 

According to current Agency guidelines for Fannie Mae and Freddie Mac:

“A transaction that requires one owner to buy out the interest of another owner (for example, as a result of a divorce settlement or dissolution of a domestic partnership) is considered a Rate & Term” (aka Limited Cash-Out) Refinance if the secured property was jointly owned for at least 12 months preceding the disbursement date of the new mortgage loan

 

In other words, if the In-Spouse wishes to access more than 80% LTV in equity (and/or wishes to avoid Cash-Out pricing adjustments), both the In/Out Spouses must have been on Title jointly for the 12 months leading up to the date of the equity buyout disbursement (i.e. the date of the new mortgage loan funding).  As many divorces can take +/- 12 months from inception to completion, knowledge of this information can be critical to know up front if one of the spouses needs to be added for qualifying/pricing purposes.

When a Divorce Equity Buyout is desired, it is recommended to consult with a Certified Divorce Lending Professional (CDLP) whenever possible.  CDLP’s are heavily trained in understanding the complicated nuances involving divorce-related underwriting/approval guidelines.  To find a CDLP in your area, CLICK HERE

 

Bonus Content: CLICK HERE to learn "what can prevent loan approval" in a Divorce Equity Buyout Mortgage.

 

  • **Mortgage guidelines are always subject to change, and the examples above only apply to a portion of a Borrower’s overall profile.  These particular guidelines are currently in place for Conforming sized loans (there are often different parameters for High Balance Conforming Loans, Jumbo aka Non-Conforming Loans, and other programs such as FHA, VA, etc.)
  • The above information is for informational & educational purposes solely and shall not be construed as an offer to lend and/or an interest rate quote.

Jason Gordon is on the Faculty of the Ilumni Institute, the premier educational platform for Real Estate Agents learning to ethicaly and effectively assist DIvorcing Homeowners and the Professionals who serve this community.  For more information, please visit www.IlumniInstitute.com

Comments (10)

Thomas J. Nelson, REALTOR ® e-Pro CRS RCS-D Vets
Big Block Realty 858.232.8722 - La Jolla, CA
& Host of Postcards From Success Podcast

As an RCS-D I concur with your info my friend. So many details for very emotional people to keep track of. That's why I'm glad we can combine our divorce training and offer some informed decisions to our clientele; great post!

Feb 19, 2021 06:32 AM
Jason E. Gordon

You have always been a true professional Thomas J. Nelson, REALTOR ® e-Pro CRS RCS-D Vets (thanks for your kind words)

Mar 08, 2021 08:38 AM
Anna Banana Kruchten CRS, CRB, Phoenix Broker
HomeSmart Real Estate BR030809000 - Phoenix, AZ
602-380-4886

Jason I did not know this information.  I have worked with many divorcing couples over the years but not a 'buy out'  of one spouse or the other, per se.

Feb 19, 2021 10:56 AM
Jason E. Gordon

Absolutely Anna Banana Kruchten CRS CRB, Phoenix Broker, I think we can all attest that there are some Divorcing Homeowners who opt to keep the Marital Home. 

Mar 08, 2021 08:38 AM
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

We have also not experienced this type of transaction. Thanks for sharing the information.  Generally, a divorce brings so many emotions to the surface, it's imperative to have a solid support team. 

Feb 20, 2021 06:59 AM
Jason E. Gordon

I think we can all agree that our clients would benefit from making decisions based on FACTS rather than ASSUMPTIONS and/or EMOTIONS. True professionals (like us) can help! Thanks Debb Janes EcoBroker and Bernie Stea JD!

Mar 08, 2021 08:37 AM
Michael Jacobs
Pasadena, CA
Los Angeles Pasadena 818.516.4393

Hello Jason - nicelypresented, well-organized and clear.  Three things which are greatly appreciated even when a situation isn't necessarily "sticky".  

Feb 21, 2021 09:49 AM
Jason E. Gordon

I always appreciate your kind words Michael Jacobs 

Mar 08, 2021 08:35 AM
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Excellent information, Jason. Thanks for taking the time to put this together.

Feb 21, 2021 11:05 AM
Jason E. Gordon

Thank you for featuring me in the Second Chance Saturday post Carol Williams!

Mar 08, 2021 08:35 AM
Dorie Dillard Austin TX
Coldwell Banker Realty ~ 512.750.6899 - Austin, TX
NW Austin ~ Canyon Creek and Spicewood/Balcones

Good morning Jason E. Gordon ,

I'm so glad that Carol Williams featured you post in her Second Chance Saturday Series as I missed your post. I learned something new..excellent information for us to file in our memory banks!

Feb 27, 2021 05:19 AM
Jason E. Gordon

I appreciate the kind words Dorie Dillard Austin TX (we can all benefit from additional perspective when guiding our clients)

Mar 08, 2021 08:34 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Jason E. Gordon - like Debb Janes EcoBroker and Bernie Stea JD has said there needs to be a solid support team.  This is important information to know.

Feb 27, 2021 07:26 AM
Jason E. Gordon

I appreciate the sentiments Grant Schneider and completely agree with you. Divorcing Homeowners are going through a challenging life transition and can benefit from as much expert guidance as possible.

Mar 08, 2021 08:34 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Hi Jason:

This is great information. It's not a type of transaction I have come across before, but good education just in case.

Jeff

Feb 27, 2021 05:31 PM
Jason E. Gordon

Thanks Jeff Dowler, CRS 


This particular instance is more of a "mortgage lender focused scenario", but a great talking point when displaying your expertise to Family Law Attorney partners (as this is informatin that can absolutely make/break any given case they are working on)

Mar 08, 2021 08:29 AM
Kimo Jarrett
WikiWiki Realty - Huntington Beach, CA
Pro Lifestyle Solutions

Great information, however, most divorcing marriages have owned their homes more than 12 months, so, wouldn't they use conventional financing instead of Fannie Mae or Freddie Mac to avoid any loan restrictions or simply sell and use the tax exemption?  

Mar 05, 2021 10:28 PM
Jason E. Gordon

Thank you for your comment Kimo Jarrett 


We are both referring to the same programs as Fannie/Freddie create the guidelines for what we call "conventional" (aka "conforming") loans.


As far as selling their home, I think we can all attest to the fact that some Divorcing Homeowners wish to keep the marital home (thus the market for equity buyouts).

Mar 08, 2021 08:32 AM
M.C. Dwyer
Melody Russell Team at eXp Realty of California, Inc. - Felton, CA
MC Dwyer-Santa Cruz Mountains Property Specialist

Thanks for putting this useful information together.    Helping the divorcing couple with their real estate can be a sensitive process!

Mar 08, 2021 09:31 AM