Updated: Feb 24
An equity buyout in a divorce is extremely common in the divorce process. It is when one spouse agrees to keep the home and buyout the other spouse for a specific percentage of the equity in the home.
The common misconception or confusion is that the spouse doing the buyout has to buy the home from the other spouse. When in fact, this is physically impossible to achieve. Think about this...If both parties are on title to the home, how can one spouse buy the home from themself? They can't! In order to buyout the equity from the other spouse he/she must refinance with a rate/term loan. It is NOT a purchase transaction. There are NO purchase contracts involved.
There must be enough equity in the home to achieve the rate/term refinance and the loan to value cannot exceed 80%. In addition, the borrowing spouse cannot take more than the amount specific for the buyout. Otherwise, it becomes a cashout refinance, which carries a higher interest rate.
This is one of the many reasons why it is so important to get a Certified Divorce Lending Professional involved early in the process. A CDLP has specific knowledge needed to set the borrowing spouse up for success after the divorce. The CDLP will provide different scenarios that create solutions to an, otherwise, difficult situation.
For more information about this or any other mortgage topic, please contact Tiffany Hughes, CDLP, CVLS, DMS at (303) 549-0891 or tiffany@AthenaMtgGroup.com