Refinancing after a divorce in California: keeping the house

When one spouse keeps the house after a divorce, the mortgage turns out to be one of the harder money questions, and it has its own rules. A quick note first: this is general mortgage information, not legal or tax advice. Your family law attorney handles the settlement itself; our part is explaining how lenders will look at it and whether the loan numbers work.

In California the family home is often community property. When one spouse keeps it, the settlement usually provides for the other to come off the loan and receive value for their share, and in practice that usually means a refinance. California registered domestic partners who end their partnership generally follow the same community property rules, so this applies to them too. Unmarried co-owners who never registered are in a different position under California law, so start with an attorney. This post is written for the spouse keeping the house. If you are the one moving out, the next section explains why your name on the loan matters even after you are off the deed.

Why coming off the deed is not the same as coming off the loan

The deed and the loan are two separate documents. The deed says who owns the house. The loan, technically the promissory note, says who promised to repay the money. A deed signed as part of the settlement can transfer one spouse's ownership, but it does nothing to the loan. A spouse who gives up ownership and stays on the note generally remains responsible for a mortgage on a house they no longer own, and late payments can show up on their credit too. A divorce judgment that assigns the payment to one spouse generally does not change the lender's rights, because the lender was not part of the divorce and never agreed to release anyone. Taking a name off the loan generally takes one of three things: a refinance into the keeping spouse's name alone, a release of liability approved by the lender, or a sale.

How a buyout refinance is sized

Many keep-the-house settlements pay the departing spouse for their share of the equity, and a new loan is often where that money comes from. Equity is the home's value minus what is owed. How much of that equity is community property, and how it is divided, is decided in your settlement, not by the lender, so the even split below is only a way to show the loan math. If one of you put separate money, such as savings from before the marriage, into the down payment, California law generally reimburses that contribution first unless it was waived in writing, which changes the numbers. Here is a simple version:

• Home value: $700,000.
• Current balance to pay off: $300,000.
• Equity: $400,000, and half of that is $200,000.
• New loan: about $500,000, roughly 71 percent of the home's value, before closing costs.
• Equity remaining with the spouse keeping the home: about $200,000.

An ordinary cash-out refinance usually tops out around 80 percent of value. Fannie Mae and Freddie Mac both treat a buyout that comes out of a divorce settlement more favorably than an ordinary cash-out when their rules are met, which can mean better pricing and, with Fannie Mae, a loan-to-value above 80 percent (mortgage insurance applies above 80 percent). The main rules: the two of you generally must have owned the home together for at least 12 months, a signed agreement has to spell out the transfer and where the loan money goes, and the spouse keeping the house cannot take any cash out of the loan. Freddie Mac also expects both of you to have lived there as your primary residence. Whether a settlement fits those rules is something we check early, before anyone relies on a number.

Qualifying on one income

The new loan is usually approved on the keeping spouse's finances alone, and qualifying on one income is often the hardest part. Support you receive can help: spousal support or child support can often count as income, but lenders typically want it spelled out in the judgment or settlement, want to see that you have actually been receiving it for a period (commonly around six months), and want it scheduled to continue for at least three years after the loan closes. Support you pay works the other way, as a monthly obligation against your income. Because lenders care how support is written and how long it runs, it helps for your attorney to know what a lender looks for before the support terms are final. What those terms should be is for you and your attorney to decide.

• The signed marital settlement agreement or judgment, with the property and support terms.
• Proof of support received, such as bank deposits, if you are counting it as income.
• Your own income documents, the same as any refinance.
• A current mortgage statement and homeowners insurance for the property.

If the current loan has a low rate

Here is the part that is easy to miss. A buyout refinance replaces your existing loan in full at current pricing. If your current mortgage is a 2020 or 2021 loan near 3 percent, the new rate applies to the whole balance, not only to the buyout money, so the payment goes up on the balance you already owed as well as on the new money. That does not make a refinance wrong, but it is worth knowing the other routes while the settlement is still open.

• Keeping the existing loan: FHA and VA loans are generally assumable with the lender's approval, and an assumption that includes a release of liability can take the departing spouse off the loan at the existing rate. Conventional loans usually cannot be assumed by a buyer, but a divorce is a protected exception: federal law bars the lender from calling the loan due when a spouse is awarded the home, and when Fannie Mae owns the loan, the servicer can release the departing spouse if the spouse keeping the home qualifies alone. Servicers do not all handle these requests smoothly, so ask early and get the answer in writing. VA loans add an entitlement question worth asking about before you rely on this route.
• Balancing with other assets: a settlement can sometimes offset one spouse's share of the equity with retirement funds, savings, or other property, which shrinks the cash the house has to produce. That is a question for your attorney, and for a tax professional when retirement accounts are involved. We can show what each version would mean for the monthly payment.
• Selling: sometimes neither spouse can carry the house alone on today's terms. Knowing that early is better than finding out after the settlement is signed.

Check the loan before the buyout number is final

A costly problem is a buyout figure agreed on before anyone has checked whether the keeping spouse can finance it. If the refinance cannot close, both spouses are stuck: one has agreed to a payment they cannot fund, and the other is still on a loan for a house they no longer own. Knowing the loan side early, including what the keeping spouse may qualify for alone and what an appraisal is likely to show, gives you and your attorney real numbers to work with. Settlements often set a deadline for the refinance, so it also helps to know how long a refinance realistically takes. How the buyout amount and the deadline get negotiated is for you and your attorney to decide.