What you need to know about divorce equity buyouts – The basics

One of the numerous deliberations that divorcing spouses have includes whether to keep the house or to sell it?  At this point there are a few things one needs to understand before considering buying out a spouse. Let us begin with the fundamentals.

What is equity and what is divorce equity buyout?

What is equity? Equity is the value of the portion of your home that you legally own. When you purchase a home on mortgage, your bank has most of the equity. Equity increases in direct proportion to mortgage repayment. This means the more you pay off your mortgage, the more equity you gain.

An equity buy-out is a process of acquiring the equity ownership of an existing legal owner of real property. If the other spouse agrees to it, they must give up ownership of the home in exchange for the money.

In any buyout, each party bears a risk. If the property depreciates in the future, the selling spouse may lose out on future appreciation, and the buying spouse may feel the price was too high. 

What does the market look like? 

With our market going through significant changes right now, there is a lot of misconception and misunderstanding regarding equity buy-outs following a divorce. It can be difficult to decide how to handle your shared home with your former spouse.

An equity buy-out is a process of acquiring the equity ownership of an existing legal owner of real property. If the other spouse agrees to it, they must give up ownership of the home in exchange for the money.

How Does The Buyout Work?

1. Examine the mortgage documentation. 

Both spouses must be aware of the precise mortgage payoff balance, the breakdown of the mortgage payment, and the amount that goes to Principal, Interest, Taxes, and Insurance before either of them decide to perform an equity buy-out. 

2. Obtain information on credit and income.

The spouse who wishes to keep the house and buy out the other must meet the requirements to qualify for a mortgage on their own. 

3. Conduct a house appraisal.

Regardless of the mortgage, the spouse wishing to perform an equity buyout must be aware of the home’s current market value, particularly now with the changing markets. A favorable evaluation will make the refinancing easier. A  Comparative Market Analysis (CMA) must be taken into account when completing the evaluation. 

4. Reach a decision. 

Both spouses can experience risks and benefits from equity buyouts. A buy-out entails the homeowner keeping the home taking up the entire mortgage while also benefiting from any future appreciation. By giving up his/her portion, the spouse giving up equity is freed from the risk and financial obligation of the mortgage and receives a fixed share without having to worry about the future of the local housing market.

5. Explore other assets and alternatives. 

If obtaining a mortgage individually could be potentially challenging,  the spouse buying out the other may consider liquidating or trading other marital assets to pay off the share of the equity belonging to the other spouse. 

Following all of this, a decision will need to be made regarding whether to establish a co-ownership agreement for a specified period of time until the divorce is settled and complete, selecting the best refinancing option, and finally the process of deeds transfer.

Divorce and mortgage financing issues are commonly controversial in divorce cases, especially when one spouse is reliant on divorce income for mortgage qualification purposes. It is critical to determine whether the spouse wanting to buy out the other qualifies.

Qualifying for a mortgage is not easy anymore. Presuming one party needs to refinance in order to buy out the other party and keep the house, they need to be aware that the double whammy of rising interest rates and elevated home prices may make the decision not as straightforward as hoped for. 

Let us consider “Qualifying Income” for mortgage qualification. Let’s take a look into what income matters to mortgage underwriters: 

 Alimony/Maintenance: Along with child support, Alimony must meet specific requirements to be considered as “Qualifying Income” for mortgage financing purposes by meeting both continuance and stability tests. 

• Continuance: A key driver of successful homeownership is confidence that all income used in qualifying the borrower will continue to be received by the borrower for the foreseeable future and will continue to be paid for at least three years AFTER the date of the mortgage application. Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid. 
• Stability: A review of the payment history is required to determine its suitability as a stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer, provided the income does not represent more than 30% of the total gross income used to qualify for mortgage financing. If full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.

 Other factors that matter when qualifying for a mortgage 

Beyond your qualifying income, these factors will be considered when evaluating your application for a mortgage: Credit score, Down payment , Assets and cash reserves. 

You have given up your equity and there’s nowhere to go YET !

No doubt, buying a house is usually easier than selling a house. It is common to have a strong emotional attachment to your home, especially if you’ve lived there for a long time and have created memories. There is no one-size-fits-all solution, but there are some steps you can take to find adequate housing in your fresh start.

As a potential buyer you need to maximize your opportunity to get offers accepted. Following are some preventative actions our clients take during the divorce to help in moving on after the equity buyout.

1. Credit 

Do not max out credit cards—keep balances at 50% or less (even if this means raising credit limits in order to keep the 50% ratio). Do not miss payments on revolving debt (house, car, credit cards, loans, etc.). 

 2. Income 

Obtain employment, work extra hours or even two jobs to pay down debt and save up. This can be counterintuitive to a support strategy in which higher wages can mean higher support payments for the payor or lower support for the recipient. This should be weighed against the client’s goals and ability to obtain adequate housing.

 3. Budget 

Divorce is expensive. Develop a budget and track it on a spreadsheet or app that makes tracking expenses easy and accountable.  Identify the down payment needed to get into a property and make it a budget item. 

4. Get into Survival Mode

The length of your road to recovery will be in direct proportion to how accountable you are to your finances. It may feel uncomfortable, but if you play your cards right, survival mode won’t last forever. 

You must remember that moving to a new place does not imply that you have to detach yourself from fond memories created. Even if you no longer own the house, it will always have a special place in your heart. If you have a case with real property issues or one that needs to be listed, give me a call at the number below or send me an email – I’m happy to help!

© LAUREL STARKS, CEO & Founder,  © The Ilumni Institute 

Katina Farrell, CDRE is an experienced Realtor & Managing Broker who specializes in real estate transactions, with expertise as a trained Certified Divorce Real Estate Expert and a Certified Negotiation Expert. To schedule a complimentary chat and discover more ways Katina can help you resolve the real estate challenges plaguing your divorce cases, call: 720-