How can I keep my home in a divorce?
Usually, if one party is keeping a home, they have to refinance after divorce to put the mortgage in their own name. Of course, every divorce is different, but this is the most typical situation.
Arizona is a community-property state. That means that any assets or debts, that are accumulated during the marriage, are split equitably. It does not matter who writes the check each month, and regardless of whose name is on the mortgage note— the home is community property.
For example, perhaps you bought a home for $200,000 as a married couple (or even just a married person in Arizona). Now you want to separate from your spouse and the home is worth $300,000. That would mean that there is $100,000 in equity. (For this example, we are not including the mortgage being paid down.)
One of the spouses could refinance after the divorce, and take a loan amount of $250,000. Meaning, they would refinance the $200,000 mortgage with $50,000 “cash-out.”
Potential Problems with Refinancing After Divorce
There can be a lot of problems with refinancing after a divorce.
Waiting on the Divorce Decree
Oftentimes, in a divorce, a physical separation has already occurred. Meaning, one of the parties has moved out. Both parties are anxious to close on the refinance, but they must wait for the divorce decree to be signed. This can take up to 5 months in Arizona, with an uncontested divorce.
A loan officer can’t even lock your rate or tell you what your interest rate will be, until the judge signs the paperwork. With a volatile mortgage market, this can be very stressful.
Not Enough Income as a Sole Borrower
When couple’s buy a home together, they usually get the maximum they can afford. The loan officer will tell them that they qualify for a $400,000 home— so that’s how much they spend. The problem is that the loan officer used both of their incomes to qualify. After a divorce, there is only one income and the “debt-to-income” ratio is too high for the borrower to qualify.
Not Enough Equity For Cash Out (High Loan-to-Value Ratio)
To refer back to our earlier example: Let’s say the loan amount is $200,000 and the home value is $300,000. The spouse that is keeping the home refinances and takes out $250,000. However, there are also title fees and escrows that will amount to several thousand dollars. With a loan amount of $253,000 your Loan-to-Value (LTV) would be 84%. Taking cash out over 80% will cause your interest rate to go up. In addition to that, if your LTV is over 80%, you will also be paying mortgage insurance. Even if you could afford the previous payment on one income— the new payment may be impossible to afford once mortgage insurance and a higher rate is factored in.
Ex-Husband or Ex-Wife Not Participating
When we refinance your old mortgage, we need to get a payoff amount from the bank that you currently pay. If both of your names are on the mortgage, we need both borrowers to sign an authorization allowing us to get the payoff.
Sometimes, after a divorce, the other spouse goes “no contact” and we have to chase them to get them to sign the payoff amount.
Important: If your spouse refuses to sign the payoff or help you refinance, you would serve them with a Petition to Enforce and the judge will force them to sign the necessary paperwork. However, this comes at a cost and it stretches the time even further.
Do I Owe My Spouse Equity if it’s My House?
If you purchased your home before you were married, the home would be considered your separate property. However, if your home has gone up in value, your spouse is entitled to some equity.
To calculate how much equity your spouse is entitled to, Arizona judge’s use the Drahos Calculation. You can read about Drahos here.
If you need help refinancing after divorce, call Michael George at 602-753-9600.
Michael George
Arizona Wholesale Mortgage
NMLS ID 2280851