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
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com
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*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.
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