Cash-Out Refinance for a Divorce Buyout

Divorces typically involve splitting marital assets, including built-up equity in the family home. A cash-out refinance can allow one partner to remain in the residence while buying out the ex-spouse’s share of equity.

We’ll cover the main points you need to know about using a cash-out refinance for a divorce buyout — including the pros, cons, and some alternatives worth considering.

How Does a Cash-Out Refinance Work in a Divorce Buyout?

A cash-out refinance involves taking out a new loan larger than your current mortgage, with the difference issued as a lump sum at closing. In a divorce buyout, the partner staying in the home refinances into their name alone and uses the cash-out proceeds to pay off the other spouse’s share of the equity.

Example: A couple filing for divorce has a $150,000 mortgage on a home valued at $400,000, giving them $250,000 in equity — or $125,000 each if split evenly. The spouse staying in the home would do a cash-out refinance for $275,000, paying off the $150,000 existing mortgage and compensating the departing partner for their $125,000 share.

Most standard cash-out refinances require you to retain at least 20% equity after taking out funds. That means a traditional cash-out approach is most practical for homeowners with at least 40% equity. However, borrowers refinancing for a divorce buyout may qualify for a special equity buyout refinance, which we’ll cover below.

The Process

A cash-out refinance for a divorce buyout goes through a lender’s complete underwriting process. Plan for it to take four to six weeks, though your timeline may vary. Here’s what to expect from start to finish.

1. Determine the Equity in the Home

Your equity is the difference between your home’s value and any outstanding mortgages or liens. While online estimators can give you a rough idea, a professional appraisal is the most accurate way to establish value — and you’ll need one anyway as part of the refinance process. Most appraisals cost between $350 and $600.

2. Agree on a Buyout Amount

Once you know your equity, the next step is agreeing on how much each spouse is entitled to. Many divorces split equity equally, but that’s not always the case. Before settling on a number, it’s wise to get legal and financial guidance from professionals familiar with divorce settlements and the laws in your state.

3. Apply for a Refinance

Applying for a cash-out refinance is similar to taking out your original home loan — it involves a detailed credit check, proof of income and assets, and a new appraisal. The spouse staying in the home must qualify for the mortgage on their own, which can be a challenge for those who previously qualified based on dual income, especially when the new loan balance is higher.

Standard Cash-Out Refinance

A standard cash-out refinance lets you borrow up to 80% of your home’s value. On a $400,000 home, that’s up to $320,000 — enough to cover the existing mortgage and the equity buyout in most scenarios.

You’ll need to meet your lender’s credit score minimum and debt-to-income limits (typically 43–50%). Conventional guidelines require a minimum score of 620, though many lenders set higher minimums. Refi.com requires a 660 credit score for a conventional cash-out refinance.

Equity Buyout Refinance

Fannie Mae maintains special guidelines that allow borrowers to refinance to buy out a co-owner’s interest, including in divorce situations. This “divorce buyout refinance” lets you take cash at closing for the sole purpose of an equity buyout while still being treated under rate-and-term refi guidelines. Requirements include:

• Both parties must have jointly owned the home for at least 12 months
• Both parties sign an agreement specifying how much the departing party will receive
• The remaining spouse qualifies for the new loan on their own
• The remaining spouse does not receive any cash proceeds from the transaction

The equity buyout refinance offers two key advantages over a standard cash-out refi:

• Higher loan-to-value ratio — up to 95–97%
• Lower interest rate than a standard cash-out refinance

Note: Borrowers using an FHA-backed refinance may also qualify under the agency’s rate-and-term program, since FHA guidelines classify a divorce buyout as “property-related indebtedness” — making it eligible for inclusion without requiring a full cash-out refi.

4. Close and Disburse Funds

Once underwriting is complete, your lender will schedule a closing date — when all paperwork is signed, the refinance is finalized, and ownership transfers. Federal law allows for a three-day waiting period after closing on a refinance, so expect funds to be disbursed to the departing partner within three to five days after closing day.

Benefits of a Cash-Out Refinance for a Divorce Buyout

• One partner can remain in the home, minimizing disruption for them and any children involved.
• The staying spouse becomes the sole borrower on the mortgage, freeing the departing spouse to seek new housing without being tied to two mortgage obligations.
• Interest rates and terms are typically more favorable — especially with an equity buyout refinance — than alternatives such as a home equity loan or HELOC.

Potential Challenges and Risks

• The remaining spouse must qualify for the new mortgage on a single income.
• Monthly payments may increase due to the higher loan balance and potentially higher interest rate.
• If the new payment becomes unaffordable, the remaining spouse risks foreclosure or being forced to sell.
• Closing costs — typically 2% to 4% on conventional loans — reduce the net funds available for the buyout.

Cash-Out Refinance Options

• Conventional Cash-Out: Allows you to borrow up to 80% of your home’s value. Requires a minimum credit score of 620 per conventional guidelines, though many lenders require more. Refi.com requires a 660 FICO score for a conventional cash-out refinance.
• FHA Cash-Out: FHA cash-out refinances allow credit scores as low as 500 per HUD guidelines and LTVs up to 80%, but most lenders — including Refi.com — require higher. Refi.com requires a 620 credit score for an FHA cash-out refinance.
• VA Cash-Out: VA cash-out refinances are available to qualifying veterans and active-duty service members, with many lenders allowing up to 90–100% LTV. Credit score and DTI requirements vary by lender.
• Jumbo/Non-Conforming Cash-Out: For loan amounts above the conforming loan limit. Jumbo refinances typically carry stricter requirements and higher rates than conventional or government-backed options.

How Do Lenders Handle Alimony and Child Support?

Separation agreements often involve alimony and child support. Here’s how conventional lenders typically factor those into mortgage qualification.

Receiving Alimony or Child Support

These payments can be counted as qualifying income when:

• Payments will continue for at least three years
• You can document at least six months of received payments
• All six months of payments were made in full and consistently

If you’re refinancing concurrent with or shortly after your divorce proceedings, the six-month receipt requirement will likely prevent these payments from counting as qualifying income just yet.

Making Alimony or Child Support Payments

If you’re making these payments, lenders will generally count them as an ongoing debt obligation — increasing your DTI. The exceptions are when:

1. Ten months or fewer of payments remain, or
2. Payments are voluntary and not required by a court order or a legally binding agreement

Some lenders may reduce your qualifying income by the alimony amount rather than treating it as a separate debt, but this depends on individual lender policy.

Alternatives to a Cash-Out Refinance

Home Equity Loan or HELOC

A home equity loan or HELOC lets you borrow against equity without refinancing, which can be useful if you have a favorable rate on your primary mortgage. Closing costs are typically lower than a full refinance. The drawback: this approach does not remove the departing spouse from the primary mortgage.

Release of Liability

In rare cases, your lender may agree to modify the loan to remove the departing spouse without requiring a full refinance. This won’t provide funds for a buyout, but would take care of the name change on the mortgage.

Mortgage Assumption

Mortgage assumption lets the remaining spouse take over the existing loan with the same rate and terms. Fees are typically much lower than refinance closing costs, but this option doesn’t provide buyout funds, and conventional loans are not assumable. Government-backed loans (FHA, VA, USDA) generally are, though not all lenders will approve an assumption.

Selling the Home

If neither spouse wants or can afford to stay, selling the home and splitting the proceeds is the most straightforward option. Be aware of potential tax implications and consult a financial professional before proceeding.

Dividing Other Assets

Some couples offset equity by dividing other marital assets — like investment or retirement accounts — in a way that compensates the departing spouse without requiring a cash-out refinance. This can be especially appealing if refinancing would significantly increase the monthly payment.

Ready to Get Started?

If you’ve worked out the details of your settlement and a cash-out refinance is the right move for buying out your partner’s equity, start your application with Refi.com today.