One of the more challenging assets to separate during a divorce is a primary home. Your spouse will undoubtedly want his/her equity share in the home, but pulling out that equity and divesting his/her interest can be difficult. You can’t simply call the mortgage company and have a name removed. A refinance will be required. The following are some tips on refinancing and buying out a spouse for divorce.
To remove a name from a mortgage, you must refinance the loan. You must qualify to carry the debt on your own, without the income and assets of your spouse. Any other debts under your name (whether owned jointly or solely) are included as well. All debts must not exceed 50% of your monthly gross income. This is what often makes refinancing and buying out a spouse most difficult.
Other Refinance Factors
Several other factors contribute to your ability to refinance:
- Credit Score – The minimum credit score for a conventional loan is 620. FHA allows scores as low as 580. Dramatically reduced credit scores are a common result of divorce, so it’s important to be mindful of that and to make a conscious effort to pay your debts on time.
- Assets – Liquid assets such as retirement and savings accounts can offset risks due to low credit score or high debt-to-income ratio.
- Alimony and Child Support – Alimony and child support can be considered income if you have a formal agreement with your ex-spouse, can provide an award letter, and/or demonstrate a history of funds received (via bank statements).
- Payment History – Late payments on current mortgages and other debts are a huge red flag for lenders, especially if you’ve had more than one 30-day late payment in the 12 months and/or 2 late payments in the last 24 months.
Loan Amount and Interest Rates
Remember that the loan amount on your refinance will be higher because you’re taking cash out. To keep your monthly payments low, take out only as much as you need (half the equity). Additionally, interest rates are impacted by the current market, your loan balance compared to the value of the home and all of the factors listed above.
For instance, if your home is worth $700k and your current mortgage balance is $300k, you have $400k in equity. You’ll need to cash out $200k to buy out your spouse. That would make your new loan $500k, which is 71.43% loan-to-value. If your current balance was $500k, there’s only $200k in equity. You’ll need a $600k loan to cash out half. However, your new loan is now 85% of the value. This could cost you more in a higher interest rate and monthly PMI.
Depending on your income, assets, debts, credit score, and payment history, refinancing and buying out a spouse may require some creative solutions. If the income-to-debt ratio is an issue, getting a family member to co-sign the loan can help. He or she must be able to carry his/her own debts in addition to your housing expense.
If your credit score or payment history is the issue, you may not qualify to be on the mortgage at all. There are two options in this case. First, you can add a family member to your deed (keeping your name on it as well) and refinance solely in that family member’s name 6-months later. Another option is to borrow funds from a family member to pay off your mortgage and buy out your spouse. Once you improve your credit score and payment history, you can then refinance your own home to pay back that family member.
Legal Assistance with Your Divorce
Divorce matters are complex. No matter which option you use for refinancing and buying out a spouse, it’s important to have measures in place to protect your interests and that of any family members helping with your refinance. Consult with a Massachusetts divorce attorney to draft agreements and coordinate logistics. Additionally, discuss refinancing options with a mortgage loan officer.