Mortgage Refinancing & Divorce
When spouses divorce, they might mutually agree to divide their assets through written property settlement agreements. In situations where spouses cannot agree to a division, their state's laws determine the allocation using the state's marital property division laws. Marital property may include the marital residence, and one spouse may have to "buy out" the other spouse by refinancing the mortgage.
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Community Property State or Equitable Property State Basics
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Most states follow the common laws of equitable property distribution to determine property allocation during divorce. Spouses in common law equitable property states can follow legal chains of title to determine which spouse owns the marital home. If the deed only lists the wife's name, then the home is her property. Community property states use different rules to determine ownership of the marital home. In these states, spouses share equally in property they acquire together during marriage, regardless of titling. The same rules apply to division of debts. If the home is titled jointly in an equitable distribution state, then most courts divide the home equally, requiring one spouse to refinance to provide the other spouse with his monetary share of the home or sell the home and divide the proceeds.
Decisions to Refinance
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To stay in the marital home, one spouse typically needs to refinance the marital home to remove the spouse from title and financial responsibility. If the home is free and clear of all encumbrances, then there is no need to refinance unless one spouse needs to obtain a new mortgage to pay the other spouse an equitable share. For instance, spouses who divorce in a community property state or equitable property jurisdiction need to divide the home's value if both of their names are on the deed. In this case, a home worth $500,000 at divorce will provide each spouse with $250,000 in equity if there is no existing mortgage. To pay the other spouse $250,000 or a half interest in the home's equity, the remaining spouse may need to refinance the house to obtain the $250,000.
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Bank's Requirements
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Refinancing requires the remaining spouse to obtain the loan alone. Lenders typically require down payments equal to 20 percent of the home's value to secure an 80 percent loan. The underwriting procedure requires verifying the spouse's income, ability to pay and other financial considerations to calculate the lender's risk of providing the loan to the single spouse. If there is a sufficient amount of equity in the home, lenders can expedite the underwriting process. However, if the home's value does not exceed the 20 percent requirement, then the remaining spouse must provide the down payment.
Alternatives to Refinancing
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If one spouse is not financially able to refinance the home on a single income, then spouses must sell the marital home and divide the proceeds after settlement. In this situation, courts may require the settlement company disburse the proceeds to an escrow account until the parties have a binding settlement agreement. Once the divorce is final or the parties are able to form an agreement, then the escrow company distributes the funds according to the agreement's provisions.
Considerations
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Since family laws frequently change, you should not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your jurisdiction.
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References
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