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Dear Credible Money Coach,
My son got his house in the event of a divorce. Can he refinance it to put it in his name? He also had to withdraw $80,000 to pay his wife. He finds it difficult to refinance the loan on his own. He is claiming less than $30,000 (annual income) from his business. He is the sole owner of his store which he ran for over 22 years. His credit score is over 800. His house has been appraised at $490,000 and he owes $140,000. What is the best option for him to refinance with a withdrawal? —Katherine
Hello Katherine and thank you for your question. I’m sorry your son is going through this difficult time. Divorce is never easy, and financial worries like keeping a house can make an already unhappy situation even more stressful.
In this kind of situation, it might be wise for him to discuss his situation with a real estate lawyer. The information I share here will be general in nature, and her situation may require more specific expert advice.
That said, here’s what I can tell you about a cash refinance after divorce.
Refinancing after divorce
It appears that the current mortgage on your son’s house is in his name and that of his ex-wife, since you mention that you took out the mortgage in his name only. Refinancing will allow him to pay off the current mortgage and replace it with another in his name.
To refinance, he will have to go through the application process. Potential lenders will look at factors such as his credit rating, credit history, income, and debt ratio. Normally, a credit score of over 800 should make it easier to qualify for a conventional mortgage and a competitive interest rate.
But you also mention that your son is self-employed and brings in a low annual salary of only $30,000. Since lenders want to make sure a borrower can afford the monthly payments on a conventional mortgage, it can be difficult to qualify for a low-income borrower.
Consider an FHA cash-out refinance
With a good credit rating, your son might be able to qualify for the best rates available on an FHA refinance loan.
FHA loans are insured by the Federal Housing Administration. They are generally easier to obtain than conventional mortgages.
Your son’s credit score is well above the minimum for an FHA refinance (500). And FHA lenders will often work with low-income people. His DTI ratio will be important when he applies – usually it should not exceed 50%, and even less would be better.
For an FHA cash refinanceit will also have to meet a few other criteria:
- He must have lived in the house for at least 12 months before applying.
- The last 12 months of mortgage payments on the house must all have been made on time.
- He must have at least 20% equity in the house.
Note that he will not be eligible for an FHA Streamline refinance, which has fewer hurdles to clear, unless the current mortgage is an FHA loan and his name is on it.
Capital requirements for refinancing
Whether conventional or FHA refinance, lenders generally require a borrower to have at least 20% equity in the house. And the amount of money your son can withdraw will be determined by the value of the house and his existing loan.
Lenders generally don’t allow you to borrow more than 80% of a home’s value. If your son’s house is worth $490,000 and he owes $140,000, the maximum he could withdraw would be $252,000, which is more than enough to pay his ex-wife. Here is the calculation:
- $490,000 x 0.80 = $392,000 (the total amount he can borrow)
- $392,000 – $140,000 (current mortgage amount) = $252,000 (equity available)
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About the Author: Dan Roccato is a Clinical Professor of Finance at the University of San Diego Knauss School of Business, personal finance expert Credible Money Coach, published author and entrepreneur. He has held senior positions at Merrill Lynch and Morgan Stanley. He is a recognized expert in personal finance, global securities services and corporate stock options. You can find it on LinkedIn.