Removing your Spouse from the Deed of your House with an FHA Refinance
When couples separate or divorce, the spouse who moves out often wants a share of the equity in the home they bought together. Many assume that this means that they must sell the home to split the equity.
If one of the homeowners wants to remain in the home, it can be worked out to the agreement of both parties, even if there isn’t a lot of equity in the home. The assumption that the home must be sold is often based on the feeling that there isn’t enough equity in the home to qualify for a “cash out” refinance. For example, if a home has an appraised value of 200K and a current mortgage balance of 160K, then the ex-spouse that is moving out might say “There is 40K in equity. If you want the house, I need 20K”
Using this same example, obtaining this 20K to buy out the Ex with a traditional FHA cash out refinance would be impossible. FHA cash out refinances cap the total amount borrowed to 85% of the appraised value. This means if the home appraises at 200K, the new base FHA loan amount will be capped at 85% of this, or 170K. If the current mortgage balance is 160K, and closing costs are 2K, then this only leaves only 8K to pay off the spouse. The spouse isn’t getting the 20K they think they deserve and forces the home to be sold.
If one of the spouses does want to continue living in the home, the FHA allows this using the FHA Equity Buy Out Program. The name of this program is exactly what is says. This program allows the spouse who is remaining in the property to buy out any other title holders without the transaction being limited to the 85% maximum Loan to Value that we would see with a traditional FHA cash out refinance. When buying out an ex-spouse to remove them from the title of the home, you borrow up to 97.75% of the home’s value.
Using our original example, based on a 200K appraised value, the maximum loan amount with this program would be $195,500. With a current mortgage balance of 160K and 2K in closing costs this would result in about $33,500 in available equity. The spouse was happy with 20K to remove themselves from the title and deed. This will now work.
The advantage of this program is that it allows more breathing room for the buy out to work even if you are dealing with a lower appraisal value.
Let’s say the spouse demands 20K to sign off on the house no matter what the value of the home is. In our scenario with a current mortgage balance of 160K and 2K in closing costs, the home would only need to appraise at about 187K to enable the 20K buy out.
Can the spouse who is the staying in the home receive any cash too?
Not really, the borrower who is staying in the home can not receive more than $500 at closing, no matter how much equity is available. This program is only for buying out other title holders. The title company handling the closing will issue the funds directly to the ex-spouse.
What if the spouse that wants to stay in the home hasn’t been living in the home recently?
This is fine as long as the spouse was on the original mortgage and deed.
What are the requirements of this FHA Equity Buy Out program?
The mortgage underwriter will need to see a signed Marital Settlement Agreement stating the agreed upon equity split. The spouse who is leaving the home will sign a Quit Claim Deed which removes them from the deed of the home. The FHA Equity Buy Out program will establish a new mortgage and title in just the remaining spouse’s name.