Divorce Buyout Mortgages

By
Mortgage and Lending with Guaranteed Rate, Marin County, CA NMLS: 22343

Divorce Buyout Mortgages

  

I don't think it would have surprised many married couples to learn, as they worked from home in a room that may have doubled and tripled as a dining room, nursery and rec center, that divorce filings were up 34% over the first half of 2020 and as pandemic despondency set in and influenced nearly every aspect of work, home and social life.

 

I would be the last one to make light of the stresses that COVID imposed on marriages and households, but instead I did see this unique time as equally opportune for shining a bright light on how divorce buyout mortgages work.  These types of transactions constitute a percentage of the refinances we do each year and particularly at such critical junctures in our clients' lives, it's helpful to be a source of reliable and reassuring information.  An equity buyout mortgage may enable one spouse to retain the family home and leave that part of their world intact while also allowing the spouse who is "bought out" to begin the next chapter of his or her life.

 

Sometimes it's most helpful to use an example to illustrate how a divorce or equity buyout refinance might work.  Let's say a married couple purchased a home together for $500,000 and made a down payment of 20% of the purchase price.  They jointly had $100K in equity (aka, "ownership") and they started with a $400,000 mortgage at the time of purchase.

 

Fast forward to the depths of COVID and this couple decides to divorce.  By that time, they have paid the mortgage down to $380,000 and the home is appraised at $540,000.  Their equity position is now $160,000, or $80K per spouse.  In order for one spouse to buy out the other, a mortgage of $460K would be necessary ($380K + $80K).  But some things need to happen first.

 

In any divorce situation, it's critical that the spouses/borrowers are working from an enforceable divorce decree.  A loose or informal separation agreement won't work for a mortgage lender.  Without a formal separation document, a home loan originator would have additional concerns about the future disposition of assets, spousal support, etc.  Once the marital home's status is outlined in the divorce decree, the spouse who will keep the home can work with a lender to determine how a buyout refinance needs to be structured.  Sometimes the couple will agree on a specific equalization payment and sometimes a percentage of the appraised value will dictate how much it takes to buy out the spouse who is leaving the home.  As long as the payout amount goes directly to the departing spouse, the loan is not considered a cash-out refinance, and this helps with both the rate and the maximum loan-to-value (LTV).  This is important because most often now one of the spouses will be solely carrying the housing payment and this can sometimes also be compounded by the additonal debt burden of paying spousal or child support.  Lining all of this up at the pre-approval stage and even before the decree is finalized is helpful to some.  After all, if the divorce is structured to give home to one of the spouses and that person cannot afford to support the payments, it is setting the family up for failure.

 

Navigating a divorce buyout scenario often requires careful planning and always benefits from clear advice.  We're here to help at any stage of the process, understand the inherent difficulty in these situations and can work with all parties to foster a better understanding and clear a path to success.

 

 

You can go your own way,

 

Rob Spinosa
Vice President of Mortgage Lending

Guaranteed Rate
NMLS: 22343 
Cell/Text: 415-367-5959 
rob.spinosa@rate.com

 

Marin Office:  324 Sir Francis Drake Blvd., San Anselmo, CA  94960

Berkeley Office:  1400 Shattuck Ave., Suite 1, Berkeley, CA  94709
 

*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate.  In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate's Human Resources Department.

 

Guaranteed Rate. Illinois Residential Mortgage Licensee NMLS License #2611 3940 N. Ravenswood Chicago, IL 60613 - (866) 934-7283

Comments (8)

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

Good info, Rob. Sad that these kinds of scenarios happen but they do.

Jul 18, 2021 08:25 AM
John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Hello Rob Spinosa very good educational report about divorce buyout mortgages.

Jul 18, 2021 10:52 AM
Grant Schneider
Performance Development Strategies - Armonk, NY
Your Coach Helping You Create Successful Outcomes

Good morning Ron - that is some interesting informnation about mortgage eligibility.  Thanks for sharing it.

Jul 24, 2021 04:34 AM
Wayne Martin
Wayne M Martin - Chicago, IL
Real Estate Broker - Retired

Good morning Ron. Even during the difficult process of divorce where tensions are hugh, a bit of cooperation can be beneficial to both parties. Enjoy your day.

Jul 24, 2021 05:03 AM
Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker, eXp Realty - Kalispell, MT
Helping your Montana dreams take root

Divorce can be a very stressful time. Knowing there are options to moving forward is helpful.

Jul 24, 2021 06:02 AM
Jeff Dowler, CRS
eXp Realty of California, Inc. - Carlsbad, CA
The Southern California Relocation Dude

Hi Rob:

Excellent education here. It's certainly unfortunate when these scenarios happen but good to know there is a way to work out an equitable way for both parties to move one, provded they have an enforceable divorce decree.

Jeff

Jul 24, 2021 10:25 AM
Sheri Sperry - MCNE®
Coldwell Banker Realty - Sedona, AZ
(928) 274-7355 ~ YOUR Solutions REALTOR®

Hi Rob Spinosa - This is a solution that can give a divorced person some hope and help both of them to move on with their lives.

Jul 25, 2021 09:35 AM
Jim Patton
Aspire Home Real Estate 209-404-0816 - Modesto, CA
Realtor - Stanislaus ,Merced, San Joaquin Counties

This is something I did not know.  Thanks for sharing Rob Spinosa .

Aug 10, 2021 04:24 PM