3 Things to Keep in Mind When Refinancing Your Home
Real property is often one of the biggest items to address in divorce and we have to figure out what will happen to it. A lot of our clients tell us they want to keep living in the former marital home after the divorce, which typically involves a refinance. There are things you need to keep in mind when making that decision:
The first question to ask is” Do I Need to Refinance?”
If you and your husband are listed on the mortgage and deed, and you want to stay in the home after the divorce, then realistically you are going to have to refinance – which is the process of buying him out to remove his name from the mortgage. He would then sign a deed transferring his interest in the property to you. Of course, it’s possible that you could agree to a different arrangement with your husband, but for the most part, after the divorce, people don’t want to be financially tied to their former spouses, so removing your husband from the mortgage and transferring a deed is pretty common.
How Does a Refinance Work?
A refinance in the context of a divorce is essentially getting a new mortgage in your name alone. The first loan is paid off and you get a new loan. Typically you then buy out your husband’s interest – meaning you pay him for his share of the equity in the home. Most of the time you don’t have enough cash to pay him his share of the equity, so you get a new loan for what is owed plus your husband’s buy-out amount. When a spouse buys out another, that is called a rate and term refinance, which provides more favorable interest rates and loan terms than other types of refinancing.
Here’s an example: Say you bought your home before you separated. You and your husband are on the mortgage and deed. The house is now worth $200,000, and you have $100,000 remaining on your mortgage. The equity in the home is $100,000, so if your husband’s equity share is $50,000, you will need a loan for $150,000 — $100,000 to pay what is currently owed and an extra $50,000 to buy out your husband. The extra $50,000 will be taken out as cash and paid to your husband.
Do I qualify for a Refinance?
You will need to qualify for a mortgage without your husband’s income. We strongly encourage you to talk to a loan officer as soon as possible so you can have a clear idea of what financial requirements you need to meet in order to refinance the particular home in your case. In general, these are things loan companies are looking for from our clients to approve a refinance:
Your Income:
You need to show you have sufficient income to pay the new loan. Typically, you will need to provide at least six months of income to the loan officer so he/she knows what your income stream is. They will look at child support and spousal support payments and count that as your income if you can show that your husband and/or dad has a good history of making those payments (six months typically) and will continue to do so for at least three years. They will want to see a property settlement agreement and a final divorce decree (if you have them).
Your Debt:
The loan company is going to check your debts. You may have debt that shows up on a credit report, but that your husband is obligated to pay per the separation agreement or divorce decree. If that’s the case, the loan company will not take into account the debts your husband is obligated to pay if you can prove that there is a settlement agreement and/or divorce order/decree requiring him to pay them. On the other hand, if you are obligated to pay any debts, they would be included as debt to you. Same thing applies if you are paying spousal support or child support.
Your debt to income ratio:
Loan companies are going to look at how much of your monthly income your monthly debt payments consume. Typically you can only have a debt to income ratio no more than 50% to qualify for a loan (At least that is the maximum Fannie Mae allows). Those percentages change, so you need to confirm with your lender what the requirement is. Obviously a lower to debt income ratio is better for you, so do what you can to reduce your debt and maximize the interest rate you qualify for!
If you have any more questions or need any more information about your upcoming divorce, your refinance, or how to make sure that you’re in a good position to qualify to keep your home, give our office a call at 757-425-5200, and we’ll help you schedule a one on one consultation with one of our licensed and experienced divorce and custody attorneys. Good luck!