How Does a Divorce Affect Your Mortgage Options?
When you say “I do” to your soul mate, you never dream that it will end with splitting up the family and possessions. But divorce happens. So what does it mean when you want to buy a house while you are divorcing or after the divorce?
“It’s not a simple mortgage transaction if you are going through a divorce,” says Jody Bruns, founder and president of the Divorce Lending Association headquartered in Herscher, Ill. “And if the lender doesn’t know the situations and implications of all the aspects of divorce, they are failing those clients.”
Mortgage options during a divorce
Bruns’ new organization is about raising the knowledge and the standard of excellence for professional mortgage lenders who are helping those going through a divorce and needing lending. She just began offering the home study course for lenders to become Certified Divorce Lending Professionals. It will signify to clients that they are working with a trained mortgage professional who understands the connection between divorce law, IRS tax law and mortgage financing as they all relate to divorce and real estate, she says.
“The impact of a divorce attorney who isn’t consulting with a divorce lending specialist when doing the spousal support guidelines for the decree is huge. They won’t be structuring things correctly,” Bruns says.
For instance, if the wife retains the marital home, she then has to take out a refinance loan on the home so she can pay the husband his fair share of the marital home’s equity.
Refinancing for an equity buyout
“The most common error in lending is that the majority of lenders will charge her a bigger interest rate because they believe this type of lending is a cash-out refinance,” Bruns says. “It’s an equity buyout, and Freddie Mac and Fannie Mae both say that. So, why penalize the spouse by adding one-quarter point to their interest rate?”
One of the other lender mistakes when helping those going through a divorce is not to recognize all the tax consequences. For instance, when child support or alimony (spousal maintenance) come into play as part of the income for the borrower, many lenders don’t understand the ramifications of these payments.
“There is a big difference between income and qualifying income,” she says. “Even if you have a court order or the divorce decree says you get a certain amount every month, it’s still not considered stable income,” Bruns says.
For instance, the typical maintenance only lasts three years, she says. And just because the decree says how much someone is supposed to pay each month, that doesn’t mean it always happens, she says.
So before any decree is written, a divorce attorney should be working with a qualifying lender and getting their advice and help early on in the discussion.
Selling the home
The lender can help in the decision of whether the couple sells their marital home and then buys two lesser homes, or the one spouse refinances and then gives the equity owed to the other spouse.
Mitch Irwin, a loan officer and divorce mortgage specialist at Bell Mortgage in Woodbury, Minn., says he has seen divorcing clients who are very amicable and want to do the right thing for each other. And then there are those who are mad and fighting all the time.
“I had a couple at the end of June who wanted to start the process of selling their home and buying two townhouses. They had a $280,000 home with their kids. But they downsized to $150,000 townhomes so each of them had a place to live and raise their kids,” Irwin says.
They were able to sell the house and close on the other two properties in 60 days. They went through mediation to speed up the process without any lawyers.
“This good scenario isn’t always the case. Some of the cases frankly end up in trial. Sometimes, I end up defending one person in trial saying that one of them would be a huge credit risk,” he says. “I try hard to avoid going to court.”
One spouse keeps the home
Who will be awarded the home in the divorce is usually about who can really afford it, he says.
“However, couples that had financial problems under one roof will probably have a harder time alone financially, too,” he says.
Many times, both spouses’ names remain on the original loan because no one helped them to figure out what to do during the divorce proceedings. Even if one spouse takes over the house payments and lives there, the other spouse is still liable for the payments if the other one reneges on the responsibility. It can hurt their credit history long after the divorce took place.
“Some people don’t want to end up in that situation. Some will do 401(k) transfers to buy the house from the ex-spouse. But those can take anywhere from 90 days to six months depending on who is managing the money,” he says.
Get an expert opinion
Brun recommends that, during your divorce, you get people who are knowledgeable about real estate and lending on your side.
“You need a team approach to make everything jive and the process smoother,” he says.