Are you getting divorced? This is a stressful time, but one that will result in both you and your partner being happier in the long run. If you’ve owned property together, one of you may need to refinance to get the other person off title. Here are three things to consider:
- Will lenders call your loan a cash out refinance?
- Do you qualify for a new loan to buy out the other party?
- Is there enough equity in your home to do this?
Will lenders call your loan a cash out refinance?
If they do, why does it matter? The reason it matters is because cash out refinances often have higher rates and stricter underwriting than loans where you are not taking equity out of your home. But if you need to refinance because you’re getting divorced, and you’re not walking away with cash, lenders will not consider it to be a cash out refinance.
Example: you owe $200,000 on your mortgage. Your house is worth $400,000. You agree to buy out your partner for $100,000. You apply for a mortgage for $300,000. At closing, $200,000 goes to your old lender to pay off your mortgage, and $100,000 goes to your partner. You do not walk away with cash. Since this is a divorce buyout, you can refinance, take out cash, but still get good rates and more lenient underwriting.
Do you qualify for a new loan to buy out the other party?
Let’s continue with the example above. What happens if you sit down with your lender, explain your situation, but they tell you your ratios are too high to qualify for a loan of $300,000. What do you do then? Assuming your ex will not budge on the $100,000 figure, you have 3 options:
- See if you qualify for a no income check loan
- Find out how much you do qualify for and come out of pocket for the difference
- Ask a relative if they would co-sign for you to help you qualify
With the first option, this article will tell you about the different types of no income check loans that are available. The second option basically entails going over your debt-to-income ratios with your loan officer to find out the maximum loan amount you can get. With the third option, you would ask a relative if they would be willing to co-sign the new loan. But co-signing is a serious financial obligation for your co-signor. They are basically agreeing to pay your loan back if you default.
Is there enough equity in your home to do this?
What if you sit down with your lender and you can qualify for the bigger mortgage, but your home isn’t worth enough to meet the loan-to-value guidelines. There isn’t much you can do, other than negotiate a settlement where you buy out the other party over time when property values improve.
There are many important financial factors that go along with getting divorced. Make sure you understand what’s involved if you need to refinance because you’re getting divorced. If you’d like to talk to one of the experienced loan officers at Amerifund, please cal (888) 650-7316 or fill out this form and someone will contact you.