Eric Billock of HighTech Lending in San Diego was kind enough to send me a very informative article written by Jody Bruns, President of the Divorce Lending and Real Estate Association, about applying for a mortgage in divorce. It contains valuable tips and ideas for couples in divorce mediation to consider as they make decisions about the family residence.
Top 10 Things You Should Know About Your Mortgage When Going Through a Divorce
My clients have many questions about real estate and mortgage financing when going through a divorce. Here are the top 10 things every divorcing client should take into consideration when dealing with the marital home and/or other real estate.
- Timing of Filing the Divorce Petition. The timing of filing a petition with family court has a direct impact on mortgage financing. When a petition for divorce is filed, most mortgage lenders will require either a temporary settlement agreement or a finalized divorce settlement agreement ordered by the court in order to complete and close a new mortgage application and/or loan.
- Use/Ownership Rule. Oftentimes couples in divorce agree to hold on to the martial home until a certain event happens in the future such as a child finishing school, etc. If you anticipate any type of capital gains issue when the sale of the home occurs, please be sure to discuss your options with your attorney, mediator 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 two most common are:
- Joint Tenancy with right of Survivorship
- Tenancy in Common
- Contingent Liability. Oftentimes in a divorce situation, the Marital 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 but the Marital Settlement Agreement assigns the debt to one party, 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 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 constitutes as ‘income’ - each source must meet specific requirements to be considered as qualified income for mortgage financing.
- Equity Buy-Out. 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 the equity, it is considered an “Equity Buy Out.” Inexperienced lenders may call it a cash-out refinance, which may carry higher interest rates and lower loan to value restrictions.
- 90-Day Cash Rule. If you are 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, you should understand the 90-day cash rule from both a mortgage perspective as well as an IRS Tax perspective.
- Maintaining Credit during Divorce. Maintaining your credit during a divorce can sometimes be a challenge; however, understanding what impacts your credit score ahead of time can be beneficial. You have the ability to access your credit report from all 3 bureaus (Experian, Equifax and Transunion) annually. Visit https://www.annualcreditreport.com for your 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 you and your spouse are unable to agree on the current market value, it is often most cost effective to agree on a real estate appraiser to perform a market valuation. A professional divorce appraiser is also able to determine a value of the property at a specific period in time as well – not only the 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 people and I hope by providing this information I can defuse some the negative emotions involved.
The most common items of documentation in a divorce situation will consist of:
- An executed copy of the final Marital Settlement Agreement
- 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 meeting a 3-year continuance of income as well.
Depending on the situation of your specific divorce case, there may be a need for more or less documentation. I understand the sensitivity of many of these documents and I assure my clients that my team of underwriters will not request anything that is not needed and they value and respect our clients’ privacy as well.