How does Loan-To-Value (LTV) affect Divorce Refinance Eligibility?
Understanding Loan-to-Value (LTV) in Divorce Mortgage Planning
We recently discussed divorce refinance option. In todays post we are going to further expand on how loan-to-value impacts available lending options. When navigating the financial aspects of divorce, especially those involving the marital home, the loan-to-value ratio—or LTV—plays a critical role. Whether one spouse plans to keep the home or both parties agree to sell, understanding how LTV works can make a significant difference in the options available for refinancing or equity buyouts.
Now, before we get started, don’t forget to take advantage and download our Divorce Lending Blueprint for Success with the link below. This free guide is designed to walk you through the divorce refinance process step-by-step and is a great tool for both homeowners and attorneys alike.
What Is LTV and Why Does It Matter?
Lenders calculate LTV by dividing the loan amount by the property’s appraised value. A cash-out refinance is usually limited to 80% LTV, while a rate-and-term refinance can go up to 95% or higher, depending on the loan program. VA loans are an exception, allowing cash-out refinancing up to 100% LTV. Understanding LTV is crucial in divorce mortgage planning, as it affects refinance eligibility and the amount of equity available for settlement obligations.
For example, if a home appraised at $500,000 with an existing mortgage balance of $400,000, a cash-out refinance at 80% LTV would limit the new loan amount to $400,000 (80% of $500,000), leaving no additional equity available to tap into. However, if the homeowner qualifies for a rate-and-term refinance at 95% LTV, the loan could potentially increase up to $475,000, allowing access to an additional $75,000 of the home’s equity to fulfill settlement obligations. If using a VA loan for cash-out refinance at 100% LTV, the loan could be as much as $500,000, providing up to $100,000 of available equity.
Remember, if it is a purchase transaction, the LTV is determined by taking the loan amount and dividing it by the sales price or the appraised value, whichever is less.
LTV’s Impact on Equity Buyouts
In divorce situations, the spouse retaining the home may need to access equity to buy out the other party’s interest. The LTV cap determines how much equity can be pulled from the home during a refinance. If the property doesn’t appraise high enough or if the current mortgage balance is too large, the buyout may not be feasible without additional funds. Please stay tuned for our next post on what an equity buyout is, and why it is such an important tool to have as a divorce refinance option.
Planning Ahead for a Smoother Transition
Working with a Certified Divorce Lending Professional (CDLP®) can help divorcing homeowners understand how to structure a refinance that aligns with both legal and lending guidelines. Accurate planning around LTV can prevent delays and ensure that home equity is fairly and effectively used in the settlement.
Our dedicated team of divorce mortgage professionals will walk you through the qualifying process step-by-step. Just call, text, or email to discuss your scenario and let our Divorce Lending Practice Group go to work for you.
Call/Text: 813-935-8330
800-806-9836 Ext. 280
SeanS@MPLX.org
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As always, I want everyone to make it a great day, and look forward to seeing you right here for the next tip of the week!
P.S. – You can download our “Divorce Lending Blueprint for Success” by CLICKING HERE.
