Refinance Divorce Buyout
Recent studies show that more than 41% of all marriages end in divorce. During a divorce negotiation, one spouse will often attempt to buyout the other from their home which would result in a refinance to execute the buyout.
Divorced individuals may still qualify for a refinance divorce buyout despite having difficult circumstances such as a short employment history or being burdened by alimony and child support.
Refinance Divorce Buyout Options
When buying out your spouse or ex-spouse from the equity in your home, you have three options:
- Sell the home
- Refinance
- Use other assets to buy out your spouse
Sell the home – If you sell the home, then you are able to divide the remaining equity based upon the divorce decree. This is the cleanest way to divide the assets. However, both parties will then need to find a home to live in afterwards.
Refinance – After a divorce, one of the parties may want to remain in the home while paying off the spouse or having his or her name removed from the mortgage. Refinancing will accomplish this. In some instances, one spouse receives the entire value of the home as part of the settlement.
Using Other Assets to Buy Out Your Spouse – If you plan to buy out your spouse but want to retain the home, you may use other assets such as cash, stocks, or something else of value. Then, you would likely need to use a quitclaim deed to transfer home ownership in full.
Refinancing Challenges After a Divorce
There are some inherent challenges which occur when attempting to refinance after or during a Divorce buyout. The most common are as follows:
Work History – Often times during a divorce, one spouse has been a home maker taking care of the children and has not been working outside of the home. Without a two year work history most lenders will not approve your refinance request.
There are a few options available from non QM lenders who will allow you to refinance if you have at least 20% equity in the home.
Alimony and Child Support Payments – After a divorce, one individual may be saddled with high alimony and child support payments. These monthly obligations push the debt to income ratios up so high that it makes qualifying for a mortgage difficult. Most lenders may tell you refinancing is not possible, but there are high DTI refinance options available.
Refinance Loan Options to Buy Out Spouse after a Divorce
When buying out your spouse, each situation may differ financially. Some people may qualify with no issues, but others may struggle due to income, credit, or job history. Here are the best options for a refinance divorce buyout.
Conventional Loan – Conventional loans are the most common loans available. If you have good credit and income, then a conventional loan may be the best option for you. There is an opportunity to cash out more than 80% of the appraised value of the home and eventually the PMI can be removed. You can read more about the conventional loan income requirements.
FHA Loan – An FHA loan is the next best option and is a perfect choice if you need a higher debt to income ratio or have low credit scores. With an FHA loan, you can cash out up to 80% of the appraised value to buyout your ex-spouse. Read more about FHA Loans.
Stated Income Loans – If you find yourself in a situation where you do not have the income or the job history to qualify, then a stated income loan will be the choice for you. There is no income verification or job history requirement. However, you will need to have good credit and the interest rate will be higher than conventional or FHA. You can read more about stated income loans.
Maintain a Good Credit History
Something we hear too often when speaking to recently divorced individuals is their credit has been ruined during their separation. Situations where the ex-spouse was supposed to make the mortgage payments and didn’t or incredible credit card spending.
The relationship may be in a bad place with your ex-spouse, but somehow you need to set that aside when it comes to your credit standing. If you ruin each other’s credit, then refinancing to split the home asset may be difficult or even impossible.
Turn Over Home Ownership with a Quitclaim Deed
When a couple splits and one party retains the home, a quitclaim deed may be needed to transfer ownership over to the other party. This is something you would need to review with your divorce attorney. Plus the timing of when the quitclaim deed is executed may need to coincide with the closing on the refinance.
Refinance Divorce Buyout Questions
Are you required to refinance after a divorce?
A refinance is only required after a divorce if it is needed to satisfy the orders provided by the court during the divorce settlement. This typically happens when one party would like to remain in the home rather than sell it to split the proceeds.
What if we have missed mortgage payments?
Missing mortgage payments is something that can prevent you from getting a mortgage in the future. This includes refinancing after a divorce This is why it is critically important to continue making payments as you are going through this difficult separation and divorce process.
When is the best time to refinance when getting divorced?
If you are able to refinance before your divorce is final, then that would be optimal. It eliminates the potential to have child support and alimony as part of the DTI calculation.
Is a refinance divorce buyout considered to be a rate and term refinance?
A refinance Divorce buyout is a rate and term refinance if all you are doing is refinancing the current mortgage balance plus closing costs. If you cash out additional equity to payoff your ex-spouse, then it is considered to be a cash out refinance.
Can I refinance before my divorce is final?
You can refinance prior to finalizing your divorce if the goal is to buyout your ex-spouse or simply get him or her off of the current mortgage.
How long do you have to refinance after a divorce?
The deadline to refinance after a divorce is tied to what is required by the divorce court. There may be a timeline set to split the assets and/or to remove an ex-spouse from the mortgage. Therefore, each timeline may vary depending upon your personal situation and divorce outcome.