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.
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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.
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Divorce can be intricate, tricky and emotionally overwhelming. When you have to relocate, find new housing and decide to rent or purchase a new home, you pile on additional tasks and frustration.
Many divorcing spouses understand the financial benefits of owning a home rather than renting. While obtaining mortgage financing on any given day may often times involve a lot of paperwork and challenges, doing so during a divorce may seem overwhelming and out of reach for many.
For many reasons, divorcing clients may decide to purchase a new home with cash rather than obtaining mortgage financing. New home buyers who are in a position to pay cash for the new home need to make sure it is the right decision financially as it may cost you the ability to deduct the mortgage interest deduction on future mortgages on the new home.
The mortgage interest deduction is divided into two categories: Acquisition and Home Equity Indebtedness. Acquisition Indebtedness is any mortgage obtained to either purchase (acquire) or significantly improve the home. Home Equity Indebtedness is any mortgage obtained for any other reason than acquisition indebtedness.
When a new homeowner buys their home with cash, they need to ask themselves what their intent was for paying cash. Was it to avoid having any type of mortgage financing? Was it because they currently were unable to obtain mortgage financing because of an ongoing divorce or they didn’t qualify because they were unable to meet the requirements to use maintenance or child support as qualified income? Maybe their debt to income was too high because of their obligation to pay spousal support?
When a new homeowner pays cash for their new home, they need to ask themselves what their intent was for not obtaining mortgage financing. If their intent is to take out a mortgage to replenish their cash reserves used to purchase the home, they need to know there is a time limit to do so. Otherwise they may risk losing any future mortgage interest deductions on the new loan.
Currently IRS Tax Guidelines have a 90-day window for new homeowners to apply for a new mortgage on a home purchased with cash in order for this new mortgage to be classified as Acquisition Indebtedness. If a new mortgage is not applied for during this initial 90-day window, any new mortgage will be categorized as Home Equity Indebtedness which has a mortgage limit of $100,000 and is currently non-tax deductible through the year 2025.
What every new homeowner who buys a home with cash needs to ask themselves is “What was your intent for paying cash?” If their intent is to obtain future mortgage financing to replenish their cash reserves, they should speak to a mortgage professional and financial advisor first in order not to disqualify their future mortgage interest deduction.
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
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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:
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.
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.
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
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"Unfortunately in a divorce situation, when one spouse leaves the marital home their argument for selling the marital home is that they won't be able to purchase a new home while still tied to the mortgage on the marital home. This may not necessarily be true! Read more on how I can help you in this situation."
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In Divorce, the house is a risky asset.
When you purchased your house, by the time you got to the closing table, you had a large stack of documents and numerous consultations that informed you about what you were buying.
If you had a good realtor, they were your first line of defense. A good realtor looks for things that might affect the future marketability of the house like power lines, a busy street or a bad layout. Once you went under contract, a home inspector provided you with a detailed report about the condition of the house. You may have also received radon, termite, well, septic and stucco reports.
The bank that you used for financing obtained an appraisal to make sure you weren’t overpaying for the house and a title report to insure there were no other liens on the property. Your insurance agent may have even done their own inspection.
In divorce, however, almost none of these things happen. The custom in divorce when determining home equity is to obtain an appraisal and mortgage balance statement. But simply subtracting the mortgage balance from the appraised value is an incomplete picture of home equity.
‘Joan’ was happy and pleasantly surprised to retain the house in her divorce settlement. But before things were finalized, she obtained a home inspection only to find there was a very small crack in the brick mortar that ran from one side of the fireplace to the other. With confirmation from a structural engineer, she learned that the chimney had been slowly pulling away from the house over the 20 plus years they lived there. It had happened so slowly, the small crack went unnoticed, but the $35,000 to $40,000 estimate to fix this didn’t.
‘Steve’ agreed to keep the house and his soon to be ex wife kept her pension. They executed a quit claim deed as part of the divorce settlement and ‘Steve’ had 90 days post decree to refinance. Since he had great credit and income, he never anticipated any issues with refinancing but the bank did something nobody else thought to do before they signed a settlement agreement. The bank obtained a title report and discovered a state tax lien from his ex wife that wiped out his equity in the house.
Costly house issues that will eat up your equity are often things you don’t see as a homeowner living in the house. To get the most complete picture of the house as an asset, if you’re keeping the house, you need to look at the house as if your purchasing it a second time. Do the due diligence necessary to know what you owe, what you own, what you’re getting into, what you’re getting out of and what you’re getting stuck with.
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The attached matrix is a good starting point to see what mortgage programs are available when keeping the house in divorce; the credit score needed, how much equity you can access, child support / alimony documentation and debt ratios.
Please don't hesitate to reach out to me with specific scenarios or questions. If you're not able to down load, email me at firstname.lastname@example.org and I'll send you back the PDF.
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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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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.
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.
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.