|How you can buy out ex-spouse from a home
Stuck paying for a house that’s no longer yours?
Buying your spouse out of a property can be dicey, especially if both parties are not in agreement with one another on the debt and equity objectives. Following are ways, to separate and pay off an ex-spouse when getting a mortgage.
• Divorced or separated?: If you and your ex are still legally married but are not officially separated, this can pose problems related to the scope of the desired split when separating property and liens (loans).
• If buying a home: The ex-spouse, because you are not legally separated or divorced, would have to sign a quit claim deed releasing interest in the property you are buying, because you are still technically conjoined to that person. The key is the spouse must consent to releasing their interest in the transaction.
• If trying to buy a home, are divorced and still tied to another property: Let’s say you’re trying to purchase a home, you are legally divorced and the previous property has been awarded to your ex-spouse in the divorce decree. However, for whatever reason, your ex-spouse is not able to qualify for a new mortgage to refinance.
This happens all the time. Your credit report shows a mortgage that your name is tied to on a property you no longer own nor have responsibility for. In the eyes of the mortgage lender, because the liability (loan) is tied to the property and has not been paid off with your name associated with it, the liability is still considered to be a joint liability.
Thus it must be accounted for in your debt ratios when the lender goes to qualify you for a new loan.
Your credit score and subsequent credit history is directly affected by your ex-spouse’s sole ability to make timely mortgage payments on the joint credit account.
The only way to separate them from you beyond the divorce decree is for the other party to sell the house or refinance the mortgage taking your name off the loan, thus omitting the liability from your debt-to-income ratio on your new purchase.
• If refinancing to buy out the ex-spouse: The scenario is both you and your spouse own a home together. Without the divorce degree and without a separation agreement, both parties collectively agree that one spouse will stay in the property and will buy out the other vacating the property.
Consider the following scenario. You bought a house several years ago for $400,000, the spouse leaving the property originally contributed $50,000 towards the down payment, and this person wants their $50,000 contribution reimbursed. You refinance, cashing out $50,000 and taking a new loan with a market interest rate and term to buy-out the other party.
Assuming a divorce decree or legal separation agreement has not yet been established, the lender would require no additional further documentation, assuming both spouses currently reside at the property and are in agreement. Providing such documentation to the lender would certainly explain any questioning or clarifying that may arise in the loan process as well.
• If you are presently separated, in most loan scenarios, the lender will take in consideration any joint debt as the marital union is still in effect, this could spell trouble for qualifying purposes.
• If you are in the process of a divorce, it is ideal to complete any mortgage-related activity after the divorce has been finalized.
• If the divorce is in the future, possibly completing the mortgage transaction/buyout before the divorce has taken place could be ideal as the transaction could be wrapped up sooner for both amicable parties.
Gift monies also permitted
Let’s say you cash out, refinancing your house to pay off your spouse who’ll be leaving the property. They put in $100,000 to purchase the property originally. The house is not worth what you originally paid for the property and as such, the cash out refinance will only net them back 60 percent on the dollar. The additional 40 percent can come in the form of gift funds.
Gift funds can help solve the problem by providing additional capital to complete the transaction, completing the paying off objective. Lenders like to see gift monies coming from either immediate family or blood relatives in most instances.
Consumers trying to qualify for a mortgage while tied to another property, would be best served having an open-ended communicative relationship with their ex as the ex, can often times hold the cards in successfully completing a smooth mortgage transaction.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.