Refinancing a Divorce Buyout

• How does refinancing the divorce buyout work?
• Why do people use this option?
• State laws that limit equity takeouts
• Options to get refinancing for a house
• Making the right choice
• References

Refinancing a house buyout is a good option to remove your name from the mortgage of your family home after your divorce. This way, you are free to look for another home without the responsibility of paying off your old mortgage. 

There are specific options for how you can refinance a buyout, and there are limitations to those choices. Keep reading to learn more about how this process works.

How does refinancing a divorce buyout work?

If you and your ex are planning on dividing shared property during your divorce, refinancing your house is an option. Whether you need to do this, however, depends on the names that are on your house’s mortgage as well as the title of the house. 

The person or persons listed on a mortgage are the parties responsible for paying back the home loan. If both you and your ex have your names on the mortgage, both of you are liable for the monthly payments on the house. 

To remove your ex’s name from the mortgage, you have two options:

• Ask your lender for a liability release. This document frees a borrower from their responsibility to keep making payments on the home loan. Mortgage lenders are not obliged to release borrowers from their obligations. 
• Refinance your mortgage on the house. This is the next step if the release of liability option doesn’t work. The spouse whose name will remain on the mortgage must qualify for a new loan based solely on their income and assets. The lender must also take into account any spousal support and child support payments. 

The name (or names) listed on the title of the home (and not just the mortgage) reflect the legal owners of the home.  It is entirely possible to have your name on the house’s mortgage but not the title of the house. For example, if one spouse was not working at the time the mortgage was established, the spouse who was working – and making money – would have been the one to apply for the title of the house.

Need help understanding your home-related options?

Download Divorce & Your Home, our free three-step home solution with tips and worksheets to help you understand and make the most of your home's equity.

Download Now

Why do people use this option?

Refinancing is one method of removing a name from the mortgage, and it protects the spouse who loses ownership interest in the home. If that spouse intends to buy a house and assume a new mortgage after the divorce, refinancing is an important step for them. 

Taking a spouse’s name off the home loan will also lower their debt-to-income ratio, which will help their credit score when they want to secure a loan. 

If your name remains on the mortgage, you are legally required to pay it. Notably, if your ex got the house in the divorce but failed to make payments (or is even late on payments), their negligence could hurt your credit score. Refinancing the home removes your name from the mortgage and protects you from the consequences of a debt that is no longer yours. 

As property values have increased, you might have enough home equity to get cash from your house. A cash-out refinance can enable you to buy out your ex and keep the house. You can get money from the equity to pay off your former spouse for their share of the property. 

Free resource: Hello Divorce Home Equity Buyout Calculator

Do some states have specific laws that limit equity takeouts?

Equity takeouts are closely regulated at the state level because home equity loans call for mortgage holders to put their property at risk if they default on the loan. Every state has its own laws that impact home equity loans, and these laws are regularly updated.

Laws exist at the federal level as well. These laws address how home equity loans are managed, advertised, and sold. Some states go much further than the federal government in controlling equity takeouts. 

Texas, for example, held out until 1997 before it finally allowed home equity loans. Under the constitution of Texas, consumers are protected from predatory lenders by way of tight provisions that control how lenders operate. Any deviation from these provisions is seriously punishable by Texas law. 

Some of those provisions cover the very workings of how home equity loans function in Texas. There is a state limit on the maximum amount that homeowners are allowed to borrow. Homeowners are limited to one loan, and the lender has to perform strict due diligence to ensure that the loan is a responsible one. 

There are other laws that regulate how the terms of home equity loans are explained to borrowers. Borrowers who take out a home equity loan in Texas must receive a copy of the Texas Home Equity Early Disclosure informing them of their rights, obligations, and protections. 

The laws in Texas may seem tough, but other states have similarly strict home equity loan guidelines. If you’re thinking about a home equity loan, you should look up the laws in your state. They are meant to protect borrowers like you from taking out loans that you would struggle to pay back and to deter predatory lenders from taking advantage of you.

Options to get refinancing for a house

There are a number of mortgage refinance options. Here are some common ones:

Cash-out refinance

In this situation, a borrower takes a new loan out on their home for a greater amount than the unpaid original mortgage. In turn, they receive in cash the amount of the difference between the two loans. 

The new loan, which is for a greater amount, serves as a replacement for the borrower’s current loan, so this does not count as an additional monthly payment. Nonetheless, there is a new agreement, so there will be a new monthly payment amount.

If you do a cash-out refinance, you should review the full terms of the arrangement to know for sure how your budget is going to be affected by this refinancing. 

Cash-in refinance

This is where the borrower invests a large amount of money into the refinancing process. Paying down a large chunk of the mortgage value means the borrower (you) reduces the loan-to-value ratio, increasing the amount of home equity. This could mean reduced monthly payments or a lesser interest rate down the road.

Cash-in refinancing is good for people who have a home loan that has a higher principal than the home is worth (an underwater mortgage). 

Rate and term refinance

This lets borrowers change the loan terms and interest rate of their current mortgage. It's a good choice when interest rates are low and the borrower can look for better terms with their lender.

Under a rate and term refinance, the mortgage loan does not change in size. However, the borrower could get lower monthly payments or pay their mortgage down more quickly than expected based on the changes made. 

FHA Streamline refinance

These are good for homeowners with Federal Housing Administration loans who don’t want to go through the FHA appraisal process again and are looking to lower their monthly payments. Borrowers can choose a credit-qualifying streamline for the loan, which means the lender checks their credit score and their debt-to-income ratio, or a non-credit-qualifying streamline.

Short refinancing

This is good for borrowers at risk for foreclosure because they defaulted on their mortgage loan payments. This kind of refinance sees the lender replace the existing mortgage with a reduced-balance loan. The loan’s monthly payments are reduced to a level the borrower can more easily (and realistically) afford. If you are the homeowner, you can keep your house, and the lender loses less money than if the home had gone through foreclosure.

Short refinancing comes with the risk of hurting your credit score, and not all lenders will approve a short refinancing application. 

Making the right choice

Refinancing your home loan can open up more options for you and your spouse during your divorce. Take the time to understand the available options so you make the best choice for your situation. If you need assistance, or if there are a few points you and your ex don’t agree on, it can be worth it to enlist the help of a mediator. 

References