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With over a decade of experience in the mortgage industry, Jeff can help you explore the options available to you, so you can make the most informed decision about what is best for you and your family. Financing Real Estate is serious business and no one understands that more than Jeff. Archives
January 2019
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Property Settlement Note – a deferred payment in property settlement used to equalize property.
When divorcing couples negotiate the terms and conditions of a property settlement, they agree to a structured settlement, which is a series of smaller payments paid over time, as opposed to a lump-sum payment. In this routine, a series of payments over a period of time comes to more than the agreed upon settlement sum because the recipient normally receives interest to compensate for the delayed payment. A property settlement note is not taxable to the recipient because the IRS says that the transfer of property in a marriage is not taxable and in this scenario, the property settlement note is still a division of property. However, any interest earned and paid as a term of the property settlement note is taxable income. Important Note regarding income from property settlement note Income from a property settlement note is not always considered ‘qualifying income’ for mortgage qualifying purposes and if the income from the property settlement note is needed for qualification then it is important for you to consult with a mortgage professional who understands divorce guidelines because you want to make sure that future financing plans are achievable. Working with a Property Settlement Note & Mortgage Financing Often misunderstood mortgage guidelines are the reason for mortgage applications being denied and creating the misconception that mortgage financing is extremely hard to obtain. Working with a knowledgeable mortgage professional who understands how divorce situations transfer over into mortgage guidelines is key for setting your divorcing clients up for success post divorce. Understanding that various sources of income have varying requirements in order to be considered as ‘qualified income’ is another key component. Let’s take income from a property settlement note as an example. There are two standard requirements that need to be met in order for income from a Property Settlement Note to be used for mortgage qualifying purposes:
To further discuss how to utilize income from a property settlement note when obtaining mortgage financing please don't hesitate to reach out.
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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.
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 martial 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. 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. It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients
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Two Benefits of an FHA Loan in Divorce11/12/2018  Divorce situations can sometimes be a sticky situation when trying to obtain mortgage financing. Could an FHA mortgage loan be a solution for you ?
Traditionally, FHA mortgage loans are thought of as the best mortgage options for first time homebuyers. FHA mortgage loans have also been used for homebuyers who might be credit challenged or higher on their debt to income ratios. FHA loans may also be the answer for divorcing clients seeking mortgage financing as well. FHA mortgage loans are known to allow a lower down payment and lower interest rates. The biggest negative for making use of the FHA insured mortgage loan for most homeowners and buyers is the required FHA mortgage insurance which can make the FHA loan undesirable. Why would a divorcing client with a substantial income or substantial equity in the marital home want to utilize FHA mortgage financing after their divorce? In some cases, it might be their only option. Here are the top two reasons why an FHA loan might help your divorcing clients obtain mortgage financing in the midst of divorce. Reason #1 Frank was at the tail end of his divorce settlement and found the perfect home to purchase once his divorce was final. Perfect location close to his children’s school as well as his work commute. Frank had a solid career and a substantial salary along with a large down payment for the new home. Frank’s one obstacle to homeownership was that he would be paying his ex-wife 40% of his gross salary as maintenance. This put Frank at a 45% debt to income ratio straight out of the gate without even taking into consideration his new monthly housing payment on the new home. Frank’s best option was to utilize an FHA mortgage in order to move forward with the purchase of his new home. Because alimony/maintenance is a tax deductible liability, FHA mortgage guidelines allow for the 40% maintenance Frank was paying every month to his ex-wife to be considered as a ‘reduction to income’ rather than as a liability which is counted against his income . What makes the difference? The above chart shows us two scenarios for Frank. The first column shows us that if Frank’s ex-wife is receiving 40% of his income of $12,500 monthly, Frank would only qualify for a monthly housing expense of $625. However, using the benefit of an FHA insured mortgage that allows for the $5,000 paid in monthly maintenance to be a reduction to his income, Frank now afford a monthly housing payment of $3,375. The drawback to Frank is that the FHA mortgage includes private mortgage insurance regardless as to whether he was putting a full 20% down payment down or not. Looking into the future, if Frank’s monthly maintenance payment was to end , he could always refinance out of the current FHA mortgage into a loan not requiring the mortgage insurance. In Frank’s current situation, utilizing this benefit of a FHA insured mortgage was his best and maybe only option in securing new mortgage financing to purchase his new home. Reason #2 Sharon was under contract to purchase a newly built home from a local builder. Originally, Sharon’s intent was to purchase the home as a cash buyer but due to certain events during her divorce process, she was forced to seek mortgage financing. Sharon’s only obstacle was income. Her only source of income was maintenance from the divorce. Sharon’s divorce was finalized just two (2) weeks prior to the scheduled closing of her new home and she needed to document receipt of the awarded maintenance for six (6) months before it would be considered qualified income. Sharon was on the verge of losing not only her new home but the $50,000 she had put down on the home for upgrades. Even though Sharon was in the position of putting a 50% down payment on the new home purchase, she was not able to qualify for conventional financing because she was unable to meet the documentation requirements for support income. Conventional mortgage financing requires that in order to utilize income from support as qualifying income the borrower must be able to document six (6) months of receipt. FHA mortgage guidelines only require the documentation to show three (3) months of receipt. Fortunately for Sharon, she had received temporary orders prior to the final divorce settlement three months prior. Sharon was able to document the receipt of the required income needed to qualify for her new mortgage utilizing the three month receipt guidelines for FHA insurance mortgages. Again just as in Frank’s situation, Sharon was required to carry FHA mortgage insurance on her new loan even though she put down a 50% down payment. However, once Sharon is able to document the required six (6) months receipt of support, she will be able to refinance her current FHA mortgage to a convention mortgage and eliminate the monthly mortgage insurance. It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. As Certified Divorce Lending Professional (CDLP), I can help answer questions and provide excellent advice. 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. |
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