The decision to divorce is never easy, especially when property and shared assets are involved. If you’re lucky, both parties will simply agree on the terms of the divorce, including what will happen to the house. In some cases, both parties will agree to move from the property and list the house for sale. One party could also agree to sign over their share of the property and move on. Unfortunately, this isn’t usually the case. So what happens to your mortgage after a divorce? If you’re trying to avoid a judge’s ruling on the matter, then you have several options.
If you would like to remain in the house, but your partner does not agree to simply signing over their share of the property, then buying your partner’s share is a simple solution. Many homeowners are unable to cover this payment, however, so there are several refinance options to assist you financially.
- Cash out refinance: A cash-out refinance is a quick and easy option if you’ve built enough equity on your home. With Fannie Mae, this will require an 80 percent loan-to-value (LTV) ratio, while the Federal Housing Administration (FHA) will require an 85 percent LTV in order to qualify for this type of refinance. If you meet this requirement, then you can use the money from the refinance to buy your partner’s share of the property.
- Apply for an FHA “divorce” refinance: With this option, the FHA allows you to refinance your mortgage up to a 97.5 percent LTV, rather than their usual 85 percent limit. The money from the refinance MUST be used to buy back your spouse’s share. As you must then qualify for the loan based on your own income, none of this money can be applied towards qualification. In addition, your spouse MUST request a legally binding agreement that details how much equity has been given to you.
- Apply for a Conventional (Fannie Mae or Freddie Mac) “divorce” refinance: Similar to the FHA “divorce” option, this type of refinance lifts the LTV limit to 95 percent, but only if the property has been under both names for at least one year. When you refinance, none of the money can be applied towards qualification and you must qualify for the new mortgage on your own. All funds from this refinance must go towards paying off how much equity is used to buy your spouse’s share, how much money is needed to pay off your old mortgage, prepaid items and escrows, and any closing costs and junior liens. You cannot take any cash out over and above that.
Of course, this is only a brief list regarding what happens to your mortgage after a divorce. For more information on how to handle your property, or to learn more about home financing in general, contact one of our mortgage specialists today.