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