The Marital Home and Mortgage Financing

The marital home: typically one of, if not the biggest marital asset. The two most common ways to deal with the marital home is for one party to retain the home and pay the other party their share of the equity by refinancing the current mortgage. The other way is the home is sold and the parties split the net proceeds.

The name, Equity Buy-Out, confuses some people into thinking they have to purchase the house from the other spouse. An Equity Buy-Out is actually handled as a refinance loan, not a purchase loan. There are two types of refinances that need to considered. Just because the court orders one party to buy the equity out of the other party, that doesn’t dictate the type of refinancing category it will fall under and each one has its own limitation and requirements to be met.

The two types of refinances are either a Rate/Term refinance or a cash-out refinance. Rate/Term refinances typically have better terms with regards to lower interest rates and access to more equity. A cash-out mortgage on the other hand carries a higher interest rate and typically only allows the borrower to access up to 80% of the home's value, which can present a problem when the goal for the refinance is to actually access the equity, right?

Obviously, the goal would be to classify the refinance as a rate and term, but there are specific requirements that must be addressed in the divorce settlement agreement to make that happen.

1. In order for an equity buyout to be classified as a rate/term refinance it must meet the following requirements:
   • The equity buyout must be addressed in the homestead or real estate section of the marital settlement agreement – basically meaning it must be addressed independently. It may not be included in an addendum that identifies all marital assets and the equity distribution absorbed into the total division of the marital estate.
   • Absolutely no cashback is allowed to the borrower for debt consolidation, etc. Therefore there can be no additional equity used for attorney fees, marital debt, cash reserves, etc.
2. The borrowing spouse must have been on title for the previous 12 months. This is a key factor if for example the mortgage and title were held in the husband’s name and the wife was awarded the marital home and needs to refinance the home. Even though the court order makes her a Successor of Interest, which then allows her to refinance the home even if she isn’t on the current mortgage, the court can’t dictate which category of refinancing is applicable. 
3. Another element to consider is a Realistic time frame for refinancing. Going back to our previous discussion of the various types of income, division of debt, etc.

What if the marital home is sold and one or both divorcing parties are planning on purchasing new homes?

Involving a CDLP during the divorce settlement process is just as beneficial when both parties are selling the marital home and purchasing in the future as it is during an Equity Buy-Out.  

Obviously, if neither party were able to qualify for mortgage financing to purchase a home post-decree, it may not cause further litigation or issues with the final divorce settlement agreement, but our duty as divorce professionals is to take into consideration their future plans and address all of the issues that might stand in their way?

The division of marital debt and the timeframe and details of spousal support are just a couple of issues that can stand in their way of purchasing a new home or successfully refinancing the marital home.

We want to make sure that both parties are set up for success post-decree. This is a family in crisis. The most intimate thing in their life has failed. They need someone to throw them a lifeline even if they don’t realize it. 

Involve a Certified Divorce Lending Professional (CDLP) in the early settlement stages and obtain a complete analysis of the mortgage financing requirements. This essential and necessary step can help provide a smooth transaction post-divorce and remove unnecessary burdens and frustrations.

Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.

This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.

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