Top 10 Things Your Clients Should Know About Their Mortgage When Going Through a Divorce

Divorcing clients have many questions when going through a divorce; especially when real estate and mortgage financing are involved. Here are ten top things every divorcing client should take into consideration when dealing with the marital home and/or other real estate.

• Timing of Filing The Divorce Complaint. The timing of filing a divorce complaint with the court has a direct impact on mortgage financing. When 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.

• 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 any type of Capital Gains issue when the sale of the home occurs, they should discuss their options with an attorney and/or financial planner.

• 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

 

1. 1. 1. 1. Only for married couples

 

• Joint Tenancy with Survivorship

 

1. 1. 1. 1. If one owner dies, that owner’s interest will pass to the other owner

 

• Tenancy in Common

 

1. 1. 1. Each owner has a distinct and separate transferable interest

If they 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.
 

• Contingent Liability. Often times in a divorce situation, the property settlement agreement will specify which party is responsible for the payment of specific debt obligations. In situations where both parties are jointly obligated for the payment of a debt and the court orders one party responsible for the payment, the debt is considered a “Contingent Liability.” Note: Even though the court can order one party responsible for the payment; neither party is released from the overall obligation to the creditor.

• Qualified Income and the 6/36 Rule. There is a significant difference between what is viewed as income and what counts as ‘qualified income.’ In divorce situations there is often times the receipt of maintenance, child support and 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.
 

• Equity Buy Out. This is the most common and costly mistake clients make in refinancing. In a divorce situation where 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”. The divorce settlement agreement must be worded correctly to avoid this transaction from being considered a “Cash Out” refinance which may carry higher interest rates and lower loan to value restrictions.

• 90 Day Cash Rule. If a client is considering purchasing a new home with cash to avoid any potential mortgage financing 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.
 

• 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. Clients 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.

• 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.

• 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 your clients and I hope by providing this information I can diffuse some the negative emotions involved. The most common items of documentation in a divorce situation will consist of:

 

1. 1. An executed copy of the final Property Settlement Agreement if the Divorce complaint has been filed.
   2. Proof of age for children whom child support is paid
   3. 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 client’s 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 client’s privacy as well.