Divorce is a time of emotional and financial stress for the entire family. The first and most important decisions revolve around the children and custody if applicable. The next most important discussion is how to divide equity in the family home and whether it will be sold or retained.
First, if neither party wants nor is able to keep the family home, it should be listed for sale. A realtor can represent both parties and should be someone experienced in divorce and real estate. The most important decisions in selling the house is where to set the sales price and how the equity will be divided. This is something that should be agreed upon in writing BEFORE the house goes on the market so there is less likely to be disputes once an offer comes in. It is important for the divorcing couple to decide how they will divide expenses, repairs or other costs associated with selling the home before an offer is received. Once the home is sold, the proceeds can be divided as agreed and both parties can move forward to buy or rent their own home.
If one party wants and is able to keep the home, they can refinance to remove the other party from the note and deed to the home. The first step in this process is having the party who wishes to keep the house get prequalified for the refinance. Prequalification are typically only done in purchase transactions, but in the case of a divorce, its very important to make sure the party who awarded the home and is ordered to refinance can actually be approved before the decree is finalized. There are too many situations where a refinance is ordered in the decree, but the refinancing party is unable to be qualified. In this case, the exiting party may not be able to get the equity they were awarded from the property or be able to get their name removed from the mortgage liability. Its very important to be prequalified a lender who specializes in divorce lending such as a Certified Divorce Lending Professional (CDLP)
If equity is awarded to the exiting party, there are several ways this can be handled. The most common way attorneys and lenders achieve this is with a cash out refinance. In this situation, the party who is refinancing will pull cash out as part of the refinance and distribute it to the other party and/or keep some money for themselves for debt consolidation or other purposes. The problem with cash out refinances is in Texas we have strict rules for equity loans and a higher rate is also associated with these transactions. If the refinancing party wants/needs to pull extra cash out of the property in addition to the equity owed to the exiting spouse, the only way to do this is with a cash out refinance. Keep in mind the refinancing party must leave 20% equity in the home after the cash is pulled out so this can limit the amount that can be distributed. If the equity being accessed is ONLY needed to buy out the exiting party, then a cash out refinance is not necessary. Instead a regular rate/term refinance can be done and an owelty lien can be drawn up to dictate exactly how much equity should be paid to the exiting party. At closing, that amount will be paid directly to that party on the final closing statement. The refinancing party cannot receive any cash back at all or it becomes a cash out refinance. The benefits to doing a rate/term refinance vs a cash out is the rate is lower, fees are less, and the refinancing party is only required to keep 5% equity in the home instead of 20%. Many attorneys and lenders are unaware of this option so again it is important to work with professionals who specialize in divorce and real estate.
Creating a “team” of professionals with a family law attorney, realtor and lender who can work together in a refinance or selling transaction is extremely helpful. This team can come up with the best options to help both parties achieve their goals with as little financial and emotional stress as possible.
