Divorce Refinance and Equity Buyout: Guidelines and Considerations
Understanding Divorce Refinance: Divorce refinance, also known as equity buyout refinance, is a term often misused when referring to buying out the equity of an owner during divorce proceedings.
Types of Refinance: There are two primary types of refinance - limited cash out and cash out, each with its own features and guidelines.
Division of Marital Estate: Real estate assets in the marital estate must be divided or equalized, which can be achieved through liquidating other assets, refinancing the home, or selling the property and dividing the proceeds.
Refinance Guidelines for Divorce: Fannie Mae, Freddie Mac (for conventional loans), and Ginnie Mae (for FHA and VA loans) have published guidelines for buying out the ownership interest of a co-owner during a divorce. Fannie Mae allows you to use the Limited Cash Out Refinance guidelines and Freddie Mac does not, they consider this type of refinance to be cash-out.
Limited Cash Out Refinance: This type of refinance allows borrowers to include the payoff of the first mortgage, secondary financing, closing costs, and some cash back within the new mortgage amount. It typically permits borrowing up to 95% of the current home value, with lower interest rates compared to cash-out refinances.
Cash Out Refinance: With a cash-out refinance, borrowers can obtain additional cash beyond mortgage payoffs. However, borrowing power is capped at 80% of the current home value, and interest rates are typically higher.
Fannie Mae Guidelines: Fannie Mae's limited cash out refinance guideline states that a transaction requiring one owner to buy out another owner's interest must involve a jointly owned property for at least 12 months before the new mortgage loan disbursement. This is important because if the spouse who is retaining the home is not on title, or has not been on title the past 12 months, it will prevent the ability to complete the refinance.
FHA Guidelines: FHA calls their refinances either cash-out or no cash out. When the purpose of the refinance is to buy-out the equity of an existing title holder, the lender must obtain either their divorce decree, settlement agreement, or other legally enforceable agreement that defines the equity awarded to the title holder.
Written Agreement: All parties involved must sign a written agreement specifying the property transfer terms and proposed disposition of the refinance proceeds. Documentation demonstrating joint ownership for at least 12 months is required, except in cases of recent inheritance.
Borrower Qualification: The party buying out the other party's interest must meet Fannie Mae's underwriting guidelines to qualify for the mortgage. The borrower acquiring sole ownership cannot receive any proceeds from the refinance.
Importance of Professional Assistance: Given the unique complexities of divorce and home financing, working with a Certified Divorce Lending Professional (CDLP) who possesses empathy, knowledge, and expertise can help make informed decisions regarding home equity.