Although the Divorce Decree may determine who retains ownership of the marital home after the divorce is final, it is important to understand that the Deed, Decree and Debt are three entirely separate issues to settle. Managing the current mortgage during and after divorce can be a lot smoother when working with a Certified Divorce Lending Professional (CDLP™) and important actions are taken to preserve the rights of the spouse retaining the home.
 
The Deed & Transferring Ownership | Transfer of ownership can simply be done with a Quitclaim Deed or other instrument. When both parties are co-mortgagees on the mortgage note, there is typically no further action needed when retaining the current mortgage as-is.

However, it is important to take action and notify the current mortgagor of the ownership transfer to avoid an acceleration of the mortgage due to a transfer of ownership when the party who is retaining the home is not obligated on the current mortgage note.
 
The Garn-St Germain Depository Institutes Act of 1982 protects consumers from mortgage lenders enforcing the due-on-sale clauses of their mortgage loan documents when the transfer of ownership includes transfers to a spouse, or children of the borrower, transfers at divorce or death, the granting of a leasehold interest of three years or less not containing an option to purchase and the transfer into an inter vivos trust (or a living trust) where the borrower is a beneficiary.
 
When one spouse is awarded the marital home and ownership is  transferred leaving the current mortgage intact, the receiving spouse is agreeing to take sole responsibility for the mortgage payments through the assumption process. A loan assumption allows a transfer of ownership and leaves the loan intact at the same interest rate, loan terms and balance.
 
In some assumptions, the lender may release the original borrower from his or her obligation on the promissory note, however, in most cases, the original  borrower remains liable on the note. This means that, depending on state law and the circumstances of the particular case, if the new owner stops making mortgage payments at some point in the future and goes into foreclosure, the lender may come after the original borrower for a deficiency judgment to collect the debt.
 
Assumption & Release of Liability | When a former spouse assumes ownership of the home and the mortgage, this does not always mean the mortgage lender will release the original borrower from their financial obligation or liability on the mortgage. A loan assumption is a transaction in which a person (the “assumptor”) obtains an ownership interest in real property from another person and accepts responsibility for the terms, payments and obligations of that other person’s mortgage loan. The assumptor is liable for the outstanding obligations and unless a release of liability is requested, the original borrower will remain liable as well.
 
Successor Homeowner’s Right to Information | Another sticking point for divorcing spouses who are awarded owner-ship of the marital home and who are not currently obligated on the existing mortgage is the hurdle of obtaining information on the current mortgage.
 
Two important sets of CFPB amendments to its RESPA and TILA mortgage servicing rules went into effect April 19, 2018. One set of amendments for the first time extends the broad array of mortgage servicing protections to successors in interest—such as home-owners who inherited a home after the borrower’s death or were awarded the marital home in a divorce. These homeowners now are entitled to protections relating to loan modifications, dispute rights, monthly statements, escrow accounts, servicing transfers, and other rights afforded by TILA and RESPA to home mortgage borrowers.
 
The new rules expand the definition of a “borrower” for purposes of RESPA, and “consumer” for purposes of TILA, to include a confirmed successor in interest. Successor in interest is defined as coextensive with transfers listed in the Garn-St. Germain Act after which a due-on-sale clause may not be exercised.
 
This list includes transfers related to the borrower’s death or a divorce or separation agreement, transfers to a spouse or children, or to a trust in which the borrower is a beneficiary. Protections are afforded a successor under RESPA and TILA once a servicer has confirmed the successor’s identity and ownership interest in the property. No other requirement should be imposed as a condition of “confirming” a successor in interest pursuant to the regulation .
 
The CFPB created a special limited “Request for Information” applicable to potential successors in new RESPA § 1024.36(i). If a servicer receives any written request from a person that “indicates” that a person “may be a successor in interest” and that contains the name of the transferor borrower and sufficient information to enable the servicer to identify the loan at issue, the servicer must respond by providing the potential successor in interest with a written description of the documents the servicer reasonably requires to confirm the person’s identity and ownership interest. The servicer must acknowledge receipt within five business days and respond substantively within thirty business days.
 
A simple letter including a copy of the Divorce Decree sent to the mortgage holder may suffice as notice to the servicer. Sample wording follows:
 
 
Loan No. 12345678
 
GARN-ST. GERMAIN ACT ASSUMPTION NOTICE
 
I write to inform you that, as of April 1, 2018, my husband and I were divorced by an order of the Circuit Court of Henry County, Georgia. Pursuant to the divorce decree, Mr. Smith is required to transfer to me his entire interest in the marital residence located at 1234 Main Street. The transfer will take place on May 30, 2018. On that date, I am to assume the mortgage that encumbers the property and to make the payments thereon.
 
Therefore, pursuant to the Garn-St. Germain Depository Institutions Act of 1982, I hereby notify you of my intent to assume the Mortgage and Note. You may begin mailing statements to me immediately. Thank you for your cooperation and understanding.
​ 
 
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice. Please don’t hesitate to reach out to me directly if I can provide additional information.
 
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
 
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association
 

​How does the spouse who is awarded the marital home yet is not on the current mortgage gain access to information about the current mortgage? This isn’t as easy as you may think!
 
We all know that often only one spouse is on the current mortgage to the marital home. A mortgage is a legally binding contract, separate from a divorce decree. The original agreement between the lender and consumer cannot be modified by the court.
 
So what happens when the spouse who is awarded the marital home isn’t on the current mortgage and has no plans to refinance the home immediately into their name? The spouse becomes what’s known as a Successor of Interest.
 
Successor Homeowner’s Right to Information | Another sticking point for divorcing spouses who are awarded ownership of the marital home and who are not currently obligated on the existing mortgage is the hurdle of obtaining information on the current mortgage.
 
Two important sets of CFPB amendments to its RESPA and TILA mortgage servicing rules went into effect on April 19, 2018. One set of amendments for the first time extends the broad array of mortgage servicing protections to successors in interest—such as home-owners who inherited a home after the borrower’s death or were awarded the marital home in a divorce. These homeowners now are entitled to protections relating to loan modifications, dispute rights, monthly statements, escrow accounts, servicing transfers, and other rights afforded by TILA and RESPA to home mortgage borrowers.
 
The new rules expand the definition of a “borrower” for purposes of RESPA, and “consumer” for purposes of TILA, to include a confirmed successor in interest. Successor in interest is defined as coextensive with transfers listed in the Garn-St. Germain Act after which a due-on-sale clause may not be exercised.
 
This list includes transfers related to the borrower’s death or a divorce or separation agreement, transfers to a spouse or children, or to a trust in which the borrower is a beneficiary. Protections are afforded a successor under RESPA and TILA once a servicer has confirmed the successor’s identity and an ownership interest in the property. No other requirement should be imposed as a condition of “confirming” a successor in interest pursuant to the regulation.
 
The CFPB created a special limited “Request for Information” applicable to potential successors in the new RESPA § 1024.36(i). If a servicer receives any written request from a person that “indicates” that a person “may be a successor in interest” and that contains the name of the transferor borrower and sufficient information to enable the servicer to identify the loan at issue, the servicer must respond by providing the potential successor in interest with a written description of the documents the servicer reasonably requires to confirm the person’s identity and ownership interest. The servicer must acknowledge receipt within five business days and respond substantively within thirty business days.
 
Working with an experienced mortgage professional who is well versed in the many ways the divorce affects the mortgage is a huge benefit to both the divorce team as well as the divorcing homeowners. You can't think traditionally when working with divorce and mortgage financing.
 
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
 
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
 
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.

One of the main concerns, when one party is retaining the marital home, is that the vacating or out spouse will not be able to qualify for future mortgage financing while their name remains tied to the current mortgage.
 
When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender may not be required to count this contingent liability as part of the borrower’s recurring monthly debt obligations.
 
Contingent liabilities are debts that a court orders one party the responsibility of paying yet does not relinquish the legal obligation of paying the liability to the creditor. In a divorce situation, often times a mortgage cannot be refinanced and the marital home is not being sold. When the final divorce decree states that one party shall be responsible for making the mortgage payment including taxes and insurance, it is considered a court- ordered contingent liability that can be looked at in various ways when the non-responsible party is looking to obtain new mortgage financing.
 
While many investors have their own guidelines or ‘overlays’ to Agency underwriting guidelines, a Certified Divorce Lending Professional (CDLP) will know how to handle a Court-Ordered Assignment of Debt.

A mortgage professional working with divorcing clients needs to understand that choosing an investor for their borrower can have an impact on tax planning in the divorce settlement as well, such as avoiding potential Capital Gains taxes on the future sale of the marital home. A Certified Divorce Lending Professional (CDLP) has the knowledge to take into consideration any tax planning in conjunction with the effect of the mortgage product and investor chosen. 
Fannie Mae: As long as the final documents state who the responsible party shall be in the orders, the contingent liability will not be considered in the other party’s debt to income ratio.
 
Freddie Mac: As long as the non-responsible party has been removed from title/ownership, the contingent liability will not be considered in the debt to income ratio.
 
FHA: As long as it can be documented that the responsible party has made twelve (12) consecutive payments after the orders, the contingent liability will not be considered in the debt to income ratio for the other party.

However, some spouses will not agree to take their name off of title because their name is still on the current mortgage. Keep in mind that if the equity is bought out in cash or some other form, the vacating spouse may need to come off of title to qualify for future mortgage financing which again, may affect any tax planning contained in the final divorce settlement.

One of the main issues to consider early in the divorce process is what to do with the family residence. Often one party wishes to buy out the other’s equity in the property. Before any agreements can be reached, it must be determined if the “buying” spouse can qualify for a mortgage in his or her name.

Avoiding a Contempt of Court Issue

A Contempt of Court issue when a former spouse fails to execute their obligations in the marital settlement agreement (MSA) with regards to real estate and mortgage financing can be avoided if the right steps are taken in advance. There are many times when mortgage financing is a requirement post-decree, whether it involves refinancing the marital home to remove a spouse from the current mortgage, completing an equity buyout, or even for the purchase of a new home for one or both parties.

Oftentimes the successful execution of mortgage financing requirements in many divorces fails, not because of a lack of effort on behalf of the divorcing parties, but rather on other details within the marital settlement agreement. The two most common reasons divorcing clients are unable to successfully obtain mortgage financing have to do with qualified income and credit. The best way to avoid these issues is to consult with a qualified divorce lending professional during the settlement process rather than after the martial settlement agreement is final—this can make a big difference in ensuring the successful execution of the MSA and avoiding a possible Contempt of Court issue.

Let’s take a look at the common income and credit issues that can prevent a successful mortgage transaction.

Income vs. Qualifying Income

Oftentimes in a divorce and mortgage situation, there are various types of income to consider: employment income; alimony (spousal support) or maintenance income; unallocated maintenance income; child support income; property settlement note income; and more. Although all sources of income are considered “income” by the recipient, it is important to understand that from a mortgage financing perspective, not all sources of income are considered "qualifying income."

In order to be considered qualifying income, certain requirements of each income source must be met. For divorcing clients who will need mortgage financing once the divorce is final, involving a mortgage professional who specializes in Divorce Mortgage Lending during the divorce process rather than post decree can potentially help avoid common pitfalls when income is not considered as qualifying income.

Let’s take a look at some of the most common income issues in divorce situations with regards to alimony (spousal support)/maintenance and/or child support.

Alimony (Spousal Support)/Maintenance: Alimony, whether unallocated or allocated, along with child support must meet specific requirements to be considered as qualifying income for mortgage financing purposes by meeting both continuance and stability tests.

• Continuance: A key driver of successful homeownership is confidence that all income used in qualifying the borrower will continue to be received by the borrower for the foreseeable future. Must be able to document that income will continue to be paid for at least three years AFTER the date of the mortgage application. Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.

• Stability: A review of the payment history is required to determine its suitability as a stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer for standard conventional underwriting guidelines. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.

• Back to Work: Oftentimes one spouse has been out of the workforce for an extended absence while raising the children. Even though this spouse may have recently returned to the labor force, specific requirements must be met in order to use ordinary employment income as qualified income. The borrower must be currently employed in the current job for six months or longer and must be able to document a two-year work history prior to an absence from employment.
Common Credit Concerns With Divorcing Couples

Mortgage payment is missed: Whether an oversight or intentional, when a mortgage payment is missed, there are more repercussions than just a negative hit to the credit score.

• A single, 30-day late mortgage loan payment can cause a credit score to drop by as much as 100 points.
• A single, 30-day late mortgage loan payment may prevent mortgage financing from 12 months up to 24 months depending on the loan program and investor.
​
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice. Please don’t hesitate to reach out to me directly if I can provide additional information.

​Working with Support Income for Mortgage Financing
 
Divorce and mortgage financing concerns are often a touchy subject in divorce situations. Particularly when one spouse is dependent upon income awarded from the divorce for mortgage qualifying purposes and also when contingent liabilities are present, such as a jointly held mort-gage on the marital home.
 
Avoiding hurdles with mortgage financing in a divorce situation is easier when you have a better understanding of the potential challenges you may face when obtaining mortgage financing.
 
Income vs. Qualifying Income
 
Often times in a divorce and mortgage situation there are various types of income to consider: Employment Income; Alimony/Maintenance Income; Unallocated Maintenance Income; Child Support Income; Property Settlement Note Income; and more. Although all sources of income are considered “income” by the recipient, it is important to understand that from a mortgage financing perspective, not all sources of income are considered “Qualifying Income.”
 
In order to be considered as “Qualifying Income” certain requirements of each income source must be met. If you will need mortgage financing once the divorce is final, involving a mortgage professional who specializes in Divorce Mortgage Lending during the divorce process rather than post decree can potentially help avoid common pitfalls when “Income” is not considered as “Qualifying Income.”
 
Alimony/Maintenance, whether unallocated or allocated, along with child support must meet specific requirements to be considered as “Qualifying Income” for mortgage financing purposes by meeting both continuance and stability tests.
 
Continuance: A key driver of successful homeownership is confidence that all income used in qualifying will continue to be received by the borrower for the foreseeable future. You must be able to document that income will continue to be paid for at least three years AFTER the date of the mortgage settlement. Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.
 
Stability: A review of the payment history is required to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer, provided the income does not represent more than 30% of the total gross income used to qualify for mortgage financing. Income received for less than six months is considered unstable and may not be used to qualify for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.
 
As an example: A borrower receives a monthly income of $6,000 from varying sources. ($2,500 employment income; $1,500 maintenance income; $2,000 child support) Maintenance income is awarded for 3 years and child support is awarded until each of two children turn 18 (currently ages 5 and 7.) Borrower has been receiving both maintenance and child support for 6 months at time of application. The maintenance income is not considered as “qualifying income” because it does not meet the continuance requirement of 3 years.
 
There are many components of income considered in mortgage financing. When income from a divorce situation also comes into play, working with a divorce mortgage professional during the divorce process rather than post decree can help attorneys and divorcing clients identify and possibly avoid income qualifying issues for mortgage financing . When the situation also involves income from other sources such as property settlement notes, asset distribution income, etc. there are additional layers of stability and continuity required. 

Home Mortgage Deduction

Quite often in a divorce settlement, a lump sum payment is made to one spouse rather than establishing monthly spousal support payments. While this may effectively meet the needs of both spouses, it opens the door for problems when trying to obtain mortgage financing for the receiving spouse. Why? There is no future established income.

Utilizing the lump sum payment and establishing a Trust may be an answer to this problem.

Alimony Trust Planning

Alimony trusts are generally utilized in situations where there is sufficient wealth to obtain economic and tax benefits that outweigh the cost of administering the trust. The adversarial relationships associated with divorce can be overcome through the use of a trust vehicle. In essence, using a trust for divorce purposes can provide economic protection; achieve income and estate tax planning goals, and set aside assets for children.

An alimony trust may be utilized in circumstances where either spouse is concerned about the handling of lump-sum settlements particularly if the funds are squandered causing either spouse to be exposed to continual requests for support. Also, the recipient spouse may be concerned with the paying spouse’s ability to meet his or her financial obligations.

Other uses for Alimony Trusts:

• To hold illiquid assets
  
• To obtain beneficial income tax results
  
• To minimize estate taxes
  

Living Trusts

Revocable Trust

The revocable trust is by far the most common type of living trust. So much so that people refer to it simply as “a living trust,” or “a living revocable trust.” Just as the name hints, a revocable trust can be changed or revoked (canceled) by the grantor at any time. Doing this is not a quick job, but it can be done, which makes it a flexible option.

Irrevocable Trust

The irrevocable trust is active and cannot be change, even by the grantor. It would take a judge to decide whether a change can be made, and even then, the circumstances would have to be pretty special. This naturally makes the revocable trust a more popular option. In fact, some people might start off with a revocable trust but then convert it to an irrevocable trust later (when they’re more certain of things.)

The other thing to know about both types of living trusts is that when the grantor has died, their revocable trust automatically converts to an irrevocable one anyway (because the only person who could have change it has passed on.)

How does income from a trust help when a divorcing spouse receives a lump sum payment?
In order to be considered as “Qualifying Income” certain requirements of each income source must meet both a Continuance Test as well as a Stability Test.

• Trust income must be confirmed by obtaining a copy of the trust agreement or the trustee’s statement confirming the amount, frequency, and duration of payments.
  
• Income from trusts may be used if constant payments will continue for at least the first three years of the mortgage term as evidenced by trust income documentation.
  

Converting lump sum payments from the divorce settlement into the funding of either an alimony trust or a revocable living trust may be the answer to providing qualifying income for mortgage financing.

Contact me today to discuss the advantages of using trust income
for divorcing homeowners!

This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily - call for current quotations.  The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.

​Copyright 2020—All Rights Divorce Lending Association