10 Things You Need To Know About Your Mortgage When Going Through A Divorce
Divorce can be complicated and expensive. When it comes to real estate in divorce, mistakes are not easily fixed nor are they inexpensively fixed. Here are the top 10 things you should take into consideration when dealing with the marital home and/or other real estate in divorce.
1. Timing of Filing The Divorce Complaint. The timing of filing a divorce complaint with the court has a direct impact on mortgage
financing. Once a complaint for divorce is filed most mortgage lenders will require a property settlement agreement in order to
complete and close a new mortgage application and/or loan. This doesn’t mean that you can’t get a mortgage, but it makes it more
complicated.
2. Use/Ownership Rule. Often times divorcing couples agree to hold on to the marital home until a certain event happens in the future
such as a child finishing school, etc. If they anticipate a capital gain when the sale of the home occurs, they should discuss their
options with a CPA and/or financial planner.
3. Title Vesting. Title Vesting is the manner in which ownership/title is held on the property. Various states have various ways of
holding title; however, the 3 most common are:
- Tenancy by the Entirety - Only for married couples
- Joint Tenancy with Survivorship - If one owner dies, that owner’s interest will pass to the other owner
- Tenancy in Common - Each owner has a distinct and separate transferable interest
If you are retaining the marital home and leaving any current mortgage financing in place, please be sure to discuss current title
vesting as a divorce decree can have a default effect on title.
4. Contingent Liability. If the mortgage is to remain in the name of both borrowers and the property settlement agreement specifies
which party is responsible for the payment, then the other party can buy another house without the current mortgage being counted
even though their name remains on it. Note: Even though the court can order one party responsible for the payment; neither party is
released from the overall obligation to the creditor.
5. Qualified Income and the 6/36 Rule. There is a significant difference between what you view as income and what counts as
‘qualified income’ for a mortgage. In divorce, there is often alimony, child support and/or income from a property settlement note.
While each is constituted as ‘income’ - each source must meet specific requirements to be considered as qualified income for
mortgage financing.To be counted as ‘qualified’ income, it must be stable and ongoing which is typically defined as received for at
least 6 months and continuing for at least 36 months. There are other options available if you don’t have 6 months, but they are more
expensive.
6. Equity Buy Out. This is the most common and costly mistake borrowers make in refinancing. When one spouse is required to
refinance the marital home to give the departing spouse a cash settlement for their share of equity in the marital home, it is
considered an “Equity Buy Out”. Most borrowers think they need to do a cashout refinance which has a higher rate and strict loan to
value limits. However, if structured property, an equity buyout can be a rate and term refinance to save you interest and allow you
to borrow up to 97% of the value of the home.
7. 90 Day Cash Rule. If a client is considering purchasing a new home with cash to avoid any potential mortgage financing issues
during the divorce process and plan to take a mortgage out in the future, they should understand the 90 Day Cash Rule from both a
mortgage perspective as well as an IRS Tax perspective. From a mortgage perspective, a cash buyer has 90 days to apply for a new
mortgage and avoid the new mortgage being considered a ‘cash out’ mortgage which may carry a higher interest rate and lower loan
to value limits.
8. Maintaining Credit During Divorce. Maintaining your credit during a divorce can sometimes be a challenge; however, understanding
what impacts a credit score ahead of time can be beneficial. Borroers have the ability to access their credit report from all 3 bureaus
(Experian, Equifax and Transunion) annually. They can visit www.annualcreditreport.com for a free report.
9. Appraised Value / Appraisal. One of the first steps in dealing with real estate issues in a divorce situation is to determine the value
of the property. If both parties are unable to agree on the current market value, it is often more cost effective to agree on a real estate
appraiser to have a market valuation performed. A professional divorce appraiser is also able to determine a value of the property at
a specific period in time as well –not only current value.
10. Documentation Needed. Every divorce is a unique situation and the documentation requirements for obtaining mortgage financing
will vary depending on the situation. I understand that this is a very emotional and private time for you and I hope by providing this
information I can diffuse some of the negative emotions involved. The most common items of documentation in a divorce situation
will consist of:
- An executed copy of the final Property Settlement Agreement if the Divorce complaint has been filed.
- Proof of age for children whom child support is paid
- Proof of receipt of maintenance/support. Typically, this will require 6 months proof of receipt and again meeting the 3
year continuance of income as well.
Depending on the specifics of your case, there may be a need for more or less documentation. I understand the sensitivity of many of these documents and I want to assure you that my team of underwriters will not request anything that isn’t needed and they value and respect your privacy as well.
1. Timing of Filing The Divorce Complaint. The timing of filing a divorce complaint with the court has a direct impact on mortgage
financing. Once a complaint for divorce is filed most mortgage lenders will require a property settlement agreement in order to
complete and close a new mortgage application and/or loan. This doesn’t mean that you can’t get a mortgage, but it makes it more
complicated.
2. Use/Ownership Rule. Often times divorcing couples agree to hold on to the marital home until a certain event happens in the future
such as a child finishing school, etc. If they anticipate a capital gain when the sale of the home occurs, they should discuss their
options with a CPA and/or financial planner.
3. Title Vesting. Title Vesting is the manner in which ownership/title is held on the property. Various states have various ways of
holding title; however, the 3 most common are:
- Tenancy by the Entirety - Only for married couples
- Joint Tenancy with Survivorship - If one owner dies, that owner’s interest will pass to the other owner
- Tenancy in Common - Each owner has a distinct and separate transferable interest
If you are retaining the marital home and leaving any current mortgage financing in place, please be sure to discuss current title
vesting as a divorce decree can have a default effect on title.
4. Contingent Liability. If the mortgage is to remain in the name of both borrowers and the property settlement agreement specifies
which party is responsible for the payment, then the other party can buy another house without the current mortgage being counted
even though their name remains on it. Note: Even though the court can order one party responsible for the payment; neither party is
released from the overall obligation to the creditor.
5. Qualified Income and the 6/36 Rule. There is a significant difference between what you view as income and what counts as
‘qualified income’ for a mortgage. In divorce, there is often alimony, child support and/or income from a property settlement note.
While each is constituted as ‘income’ - each source must meet specific requirements to be considered as qualified income for
mortgage financing.To be counted as ‘qualified’ income, it must be stable and ongoing which is typically defined as received for at
least 6 months and continuing for at least 36 months. There are other options available if you don’t have 6 months, but they are more
expensive.
6. Equity Buy Out. This is the most common and costly mistake borrowers make in refinancing. When one spouse is required to
refinance the marital home to give the departing spouse a cash settlement for their share of equity in the marital home, it is
considered an “Equity Buy Out”. Most borrowers think they need to do a cashout refinance which has a higher rate and strict loan to
value limits. However, if structured property, an equity buyout can be a rate and term refinance to save you interest and allow you
to borrow up to 97% of the value of the home.
7. 90 Day Cash Rule. If a client is considering purchasing a new home with cash to avoid any potential mortgage financing issues
during the divorce process and plan to take a mortgage out in the future, they should understand the 90 Day Cash Rule from both a
mortgage perspective as well as an IRS Tax perspective. From a mortgage perspective, a cash buyer has 90 days to apply for a new
mortgage and avoid the new mortgage being considered a ‘cash out’ mortgage which may carry a higher interest rate and lower loan
to value limits.
8. Maintaining Credit During Divorce. Maintaining your credit during a divorce can sometimes be a challenge; however, understanding
what impacts a credit score ahead of time can be beneficial. Borroers have the ability to access their credit report from all 3 bureaus
(Experian, Equifax and Transunion) annually. They can visit www.annualcreditreport.com for a free report.
9. Appraised Value / Appraisal. One of the first steps in dealing with real estate issues in a divorce situation is to determine the value
of the property. If both parties are unable to agree on the current market value, it is often more cost effective to agree on a real estate
appraiser to have a market valuation performed. A professional divorce appraiser is also able to determine a value of the property at
a specific period in time as well –not only current value.
10. Documentation Needed. Every divorce is a unique situation and the documentation requirements for obtaining mortgage financing
will vary depending on the situation. I understand that this is a very emotional and private time for you and I hope by providing this
information I can diffuse some of the negative emotions involved. The most common items of documentation in a divorce situation
will consist of:
- An executed copy of the final Property Settlement Agreement if the Divorce complaint has been filed.
- Proof of age for children whom child support is paid
- Proof of receipt of maintenance/support. Typically, this will require 6 months proof of receipt and again meeting the 3
year continuance of income as well.
Depending on the specifics of your case, there may be a need for more or less documentation. I understand the sensitivity of many of these documents and I want to assure you that my team of underwriters will not request anything that isn’t needed and they value and respect your privacy as well.
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