If you’re a homeowner who is going through a divorce or a dissolution of domestic partnership, there are some things to know about using the equity from your home to “cash out” your ex-spouse.
When someone uses a refinance to take equity out of home to provide to ex-spouse, lenders will make an exception and treat the transaction as a “limited cash-out” refinance instead of “cash out” refinance. This provides slightly better pricing with the interest rate and may allow for a higher loan amount, if needed.
In order to qualify for this exception, the following is needed:
- parties must have jointly owned the home for at least 12 months;
- copy of the filed separation agreement or divorce decree. The separation agreement or divorce decree need to include the property address, the amount if proceeds and that the proceeds are to be from refinancing;
- copy of filed support order or parenting plan, if there are children who are minors;
- either a deed will need to be prepared by an attorney or the ex will need to acknowledge a few documents, including the note and deed of trust, if they are staying on the title;
- the party who is remaining on title must be able to qualify for the new mortgage.
In addition, for this to not be treated as a “cash out” refi, the homeowner is retaining the property cannot receive proceeds from the refinance.
The ex who is being cashed out will receive the funds directly from the escrow company after closing.
Alimony or child support may be used as income for qualifying if it is going to be paid for at least 36 months after closing the refinance.
One potential benefit for both parties when someone refinances due to divorce or dissolution is that it frees one of the parties from the existing mortgage. Although a divorce decree or separation agreement may state that one party is responsible for making payments on the mortgage, the decree or separation agreement does not remove the liability to the person who was not awarded the home as long as their name is still on the mortgage. If late payments are made, this may impact the credit scores any party who’s name is on the mortgage and may prevent the other party from being able to buy another home.
Of course, I’m not an attorney and this is not legal advice. If you are considering a divorce or separation, I strongly recommend contacting an attorney who specializes in this.
Typically in late November, conforming loan limits are announced for the following year. Loan amounts under the conforming loan limit tend to have lower interest rates than loan amounts that are “high balance conforming” (available in certain counties, such as King, Pierce and Snohomish) or jumbo mortgages. 
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