Mortgages and Divorce: Guidelines to Keep in Mind
To help you successfully navigate the divorce process and secure your emotional and financial future, we’re sharing a new divorce mortgage series featuring advice from Senior Loan Officer Marc Edelstein. In the first divorce mortgage article, we shared four things everyone should know about their mortgage when going through a divorce. This week, we’re covering a few mortgage guidelines to keep in mind during a divorce to set your future up for success.
Mortgage guidelines are important for anyone trying to obtain a mortgage loan, especially for clients who are also refinancing or selling a home as they go through a divorce. While every mortgage situation is different, these guidelines can help you determine the details of your living situation moving forward from the divorce.
After you read up on the four things you need to know about mortgages and divorce, you can sit down with your Certified Divorce Lending Professional (CDLP) to discuss all of the moving parts regarding your mortgage to ensure you’re in a good position financially after the divorce is finalized.
As a CDLP, I’ve seen the emotional and financial stress a divorce can bring on a family firsthand. While the process can be daunting, I’m here, along with your professional divorce team, to ensure you’re set to succeed post-decree.
A contingent liability is when two parties originally have a joint obligation to pay a debt, but one party becomes financially responsible for it through the divorce. From credit cards and installment loans to car payments and mortgages, this could apply to any shared payment you and your spouse are making. While debt repayments can be settled on your own terms, the judge has to approve of your agreement and will finalize it in the divorce decree.
If the court orders one party to be responsible for a specific liability, the current mortgage debt is then considered a contingent liability and is not counted in the debt to income ratio for the other party when seeking new mortgage financing.
The most common example would be in the case of a mortgage on the marital home. When one spouse vacates the home, the other spouse stays in the property and is responsible for making mortgage payments and refinancing the home to remove the ex-spouse off of the mortgage.
However, it’s important to keep in mind that even though the court can order one party responsible for the payment, neither party is released from the overall obligation to the creditor. This means if the spouse making the payments misses one, it’s going to impact both of your credit reports. If you choose to sell the martial home, the mortgage will get paid off through the sale of the home and will not be considered a contingent liability.
Income 6/36 Rule
The 6/36 Rule applies to any sort of support income that is being used to qualify for the mortgage, including alimony and child support. The rule states that the income has to be earned at least six months prior and must continue to be earned for at least 36 months after your closing date to qualify for mortgage income.
The divorce decree will state how long the alimony from each spouse is to continue. After obtaining the decree, sit down with your CDLP to make sure the income will be continued for at least 36 months from the date of closing. Keep in mind, it will take about one month to process the loan, and you need to be earning the income for at least six months beforehand, and it has to continue for at least 36 months after that, so you’re really looking at 43 months total for the income to qualify.
The divorce decree will also state when child support ends for each child. The most common date is their eighteenth birthday, or high school graduation, depending on which date comes first. While it’s safe to say child support will be collected for much more than three years with a 12-year-old, a 16-year-old child is a different story. That portion of the child support would be eliminated as income for the mortgage right off the bat. If you’re curious about how much support is going to each child, you can find that information in the final order for support.
Equity Buy Out Refinancing
In many divorce situations, one spouse will keep the home and take responsibility for buying out the equity in that house for the other spouse. In most cases, the house is refinanced to get that equity out. While some may think this is considered a cash-out refinance because you’re taking equity cash out of the house, this is a no cash-out refinance because it is court ordered.
This is important to keep in mind because there are a few distinct differences between cash-out refinances and no cash-out refinances. Cash-out refinances typically have higher interest rates and more loan-to-value ratio restrictions. Cash-out refinances only allow you to borrow up to 80% of the appraised value, while no cash-out refinances let you borrow up to 95% of the appraised value.
When there is a divorce settlement agreement, it will either state the flat dollar amount that the ex-spouse is supposed to get or include a formula that shows how the number owed to the ex-spouse is calculated. As long as it’s court ordered and there is a formula or a defined number, it’s okay to choose a no cash-out refinance to take advantage of the lower interest rate and borrow at a higher percentage of the appraisal value.
Because many loan officers who do not regularly work with divorcing clients are unaware of these details, this is where working with a CDLP comes in handy. Make sure you keep this in mind and bring it up to your loan officer if you have any questions regarding refinancing your home.
Additionally, with an equity buy out, the borrower gets $0 at closing and the money will go straight to the ex-spouse after he/she signs the deed to get the check. Your CDLP can help ensure this is a seamless transaction. The divorce decree may state specific instructions that some of that money will have to go to an attorney for an existing bill. In those cases, the borrower(s) will have to come to the closing with money to pay for legal fees as directed.
Divorces are not always amicable, but your CDLP can help ensure you, your spouse and your attorneys are able to keep the communication going to guarantee a timely divorce process and a seamless mortgage transaction.
If you’d like to discuss your options with a team of industry professionals, join me and Southeast Michigan Divorce Professionals for our free Removing the Ring Divorce Workshop every month! Our next session is on Saturday, June 9, 2018. Learn more here.
If you or someone you know is going through a divorce, please feel free to share this article with them and contact us here. We are happy to answer any questions you have and refer you to one of our CDLPs.