Dividing real estate in a divorce is rarely straightforward, especially when one spouse wishes to keep the marital home. Equity buyouts offer a practical solution, allowing one spouse to retain ownership while compensating the other for their share. However, the process requires careful planning and a clear understanding of mortgage guidelines to ensure a successful outcome.

What Is an Equity Buyout?

An equity buyout occurs when one spouse refinances the existing mortgage to remove the other spouse from the loan and/or title while accessing sufficient funds to pay the departing spouse’s share of the home’s equity.

Steps to a Successful Equity Buyout

  1. Determine the Home’s Value
    • Conduct a professional general-purpose appraisal (this is different than an appraisal for home financing) or comparative market analysis (CMA) by a realtor.
    • Ensure both parties agree on the valuation to avoid disputes.
  2. Calculate Equity
    • Subtract the outstanding mortgage balance and any liens from the home’s appraised value.
    • Example: A home valued at $400,000 with a $250,000 mortgage balance has $150,000 in equity.
  3. Structure the Buyout
    • Specify the equity division in the divorce settlement agreement.
    • Address any secondary home financing, such as home equity lines of credit (HELOCs), or home improvement loans.
  4. Qualify for Refinancing
    • The retaining spouse must meet credit, income, and debt-to-income (DTI) requirements.
    • Most lenders require the retaining spouse to have been on the title for at least 12 months.
  5. Complete the Refinance
    • Choose the appropriate loan type: rate/term refinance or cash-out refinance. Rate/term refinance can only include the first mortgage payoff, equity buy-out amount and closing costs. Generally adding any consumer debt or 2nd mortgages will make the refinance a cash-out refinance. The difference between them is in interest rate. The cash-out rate will be .25% to .50% higher than the rate/term rate depending on credit score and percentage of the home’s value you are planning to borrow.
    • To take advantage of the lower rate/term interest rate, ensure no proceeds are used for anything other than the buyout, such as debt consolidation or attorney fees, to comply with guidelines.

Case Study: An Equity Buyout in Grand Rapids

Scenario:
A divorcing couple in Grand Rapids wanted to ensure a fair division of assets while minimizing disruption for their two children. The wife wanted to keep the marital home, valued at $350,000, but needed to buy out her husband’s $75,000 share of the equity.

Challenges:

  • The wife’s debt-to-income ratio was slightly above the lender’s limit due to her car loan with a remaining balance of approximately $15,000.
  • The couple’s settlement agreement did not address the HELOC balance of $25,000.

Solution:
As a Certified Divorce Lending Professional, I:

  1. Advised on Settlement Agreement Updates: Collaborated with their attorney to include specific terms for paying off the HELOC and introduced the idea of increasing the husband’s equity buyout to include the amount needed to pay off the wife’s car.
  2. Improved Debt-to-Income Ratio: Recommended increasing the equity buy-out to $90,000 and having the husband pay off the wife’s car loan with the extra $15,000. Doing this allowed the wife’s car payment to be eliminated from her qualifying debt because it was included in the terms of the buy-out and in the final settlement agreement. Yes, the new mortgage payment is a little higher because of the added $15,000, however it is considerably less than the car payment was. 
  3. Facilitated the Refinance: Arranged a cash-out refinance under Fannie Mae guidelines, ensuring the buyout funds and HELOC payoff were included in the loan.

Outcome:
The refinance closed successfully, the wife retained the home and had her car paid off, and the husband received his share of the equity. Both parties achieved financial independence while prioritizing their children’s stability.

Why Equity Buyouts Are Critical in Michigan

Michigan’s appreciating home values make equity a significant asset in divorce settlements. Without a well-structured buyout, couples risk disputes or financial instability. As a CDLP, I provide the expertise to ensure the process is seamless and equitable, helping both parties achieve their goals.

For Divorcing Clients:
Do you want to keep your home or access your equity during your divorce? Contact me for a free consultation to explore your options and develop a mortgage strategy tailored to your needs.

For Family Law Professionals:
Partner with a Certified Divorce Lending Professional to ensure your clients’ equity buyouts comply with lending guidelines and legal requirements. Let’s work together to achieve the best outcomes.

Posted in Divorce Equity Buyout, Divorce Mortgage Planning