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In most marriages, there is a marital home and it’s often the largest or one of the largest assets. Particularly if there are kids, one spouse often wants to keep the marital home. In any case, at least one of the spouse has to find a new home, and the goal may be to buy a new house or condo.
What You Need to Know About Mortgages:
Unfortunately, most lenders will not simply allow one spouse to assume the existing mortgage. If both spouses are on the mortgage, refinancing will probably be required to take one spouse off the mortgage? Why is that important? Because no matter what the settlement agreement or divorce decree says, if you are on a mortgage, the lender WILL hold you responsible for the mortgage payments. The mortgage will also continue to show up on your credit report as an obligation which may keep you from getting a loan you need for other purposes.
Refinancing comes with a cost. Fees for refinancing can be 2-4%, interest rates may have increased and your credit score may have gone down which in most cases, will make the overall cost of the mortgage higher. Refinancing is a time when you want to be smart and you want to learn about what mortgages are all about so you know what to ask when you shop and what to consider.
Another setback when buying a home after divorce for many women is they have little work/pay history. No matter your net worth, most banks today want you to have a J.O.B. If your plan is to refinance or buy a home, there is some planning and waiting you should expect. Talk to a mortgage professional early in the process.
If you are depending on alimony, child support, or other payments made under the separation agreement to qualify for a loan, you should prepare yourself for a delay. Don’t be surprised that a certain amount of payments must be made both in the past and into the future to qualify for a loan. The number of payments required will depend on whether a conventional loan or an FHA loan will be used.
If you are a senior age 62+ and are facing divorce, you may find a reverse mortgage beneficial tool when settling with your partner.
Conventional Loans:
With a conventional loan, income from alimony, child support, or separate maintenance payments may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to the borrower for at least the most recent six months and is obligated to make payments to the borrower for the next three years. Evidence (documentation) is required.
With a FHA loan, if using a final divorce decree, legal separation agreement, or court order, income from alimony, child support or separate maintenance payments may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to the borrower for at least the most recent three months. If receiving voluntary payments from an ex-spouse, the borrower must provide proof of twelve months of timely payments. In both cases, proof that payments to the borrower are required for the next three years is required and evidence (documentation) is required.
If you are the payor of support obligations, these payments will be considered debt obligations and will be counted when considering the ability to pay unless those obligations end in 10 months or less.
Existing Mortgages:
An existing mortgage will be counted even if court docs say you aren’t responsible for the mortgage. A few years back, if the separation or divorce documents stated that a party is relinquishing their rights to the home and that the other party is responsible for selling or refinancing the home, a bank would sometimes not consider the mortgage as part of your outstanding debt. No more. Any mortgage debt that anyone is obligated on now has to be counted against them as a debt (regardless of what court docs show) for most mortgage types. Even when jointly owned real estate is owned free and clear…..the taxes, insurance, and applicable HOA dues have to be counted as a debt. Refinancing to remove the financial obligation (and, of course, relinquishing all rights & interest in the property which is required by the refinancing) is the only option now.
The above loan standards applied at the time of this article. Mortgage guidelines can and do change at any time. What is important is to know is that divorce creates a time period in which obligations to or from a former spouse are taken into account and may delay the time in which you can qualify for a loan.
If you are keeping, selling, or buying a home because of a divorce, consult a Certified Divorce Financial Analyst who can help you avoid tax and other pitfalls that can occur when this important financial decision is being made.