For most couples, the marital home represents the bulk of their wealth and it’s often the single largest asset. Even if there aren’t any arguments over who stays in the home or if it is to be sold, getting off the mortgage or getting a new mortgage is rarely straightforward. There’s lots you need to know about divorcing your mortgage:
- Can you just takeover your present mortgage and take your spouse off?
- Can you refinance before your divorce is final?
- Will a Quit Claim Deed take you off the mortgage?
- What’s the difference between a Cash Out Refinance and an Equity Buyout?
- How do mortgage lenders treat child support and spousal support?
Joining me for this episode of Conversations About Divorce is Certified Divorce Lending Professional, Jody Bruns who is an expert in the area of mortgages and divorce. As a lending professional, she saw so many mistakes being made by people in her industry that she created the CDLP program to help increase the knowledge and understanding of divorce in mortgage lending. If you have a mortgage or you’re looking to qualify for a mortgage after your divorce, you need to listen to this … or keep reading.
You Can’t Just Take Your Spouse Off A Mortgage
One situation I’ve run into is where a couple currently have a home and they are both on the mortgage. The mortgage is at great interest rate and party A who wants to keep the home, isn’t sure if they can qualify for a mortgage on their own. Party A can make the current payments and so wants to just keep the mortgage. Party A wants the mortgage company to simply remove Party B from the mortgage.
Sounds like a great arrangement however, Bruns says in her 28 years in the business, “I have never seen it happen.”
Mortgage lenders are not likely to agree to simply removing a party because they want to be assured that the remaining party can make payments. That means underwriting the remaining party and it’s just like a new mortgage.
If You’re On The Mortgage, You’re Liable
So if you can’t simply remove your spouse from the mortgage, what happens to the mortgage? What if they stayed on the mortgage with the understanding that you’re the one making mortgage payments?
For Party B, there’s risk in staying on the mortgage. If you are both listed on the mortgage then you are both liable if for some reason Party A doesn’t make a payment. Even if the divorce agreement states that Party A is solely responsible for mortgage payments, it does not change the contract with the mortgage lender. In the worst case scenario, the mortgage lender will come after Party B for payments and Party B will be left pursing Party A for reimbursement.
The House Title Is Different From The Mortgage
Many people think that the solution is to simply remove their spouse from the title of the home using a Quit Claim Deed. Bruns says this is one of the biggest mistakes she’s seen. “Just because you release someone from the title does not release them from the mortgage. They are two entirely separate issues.”
And do not agree to sign a Quit Claim Deed as long as you are on the mortgage – that would mean having all the liability for what is owed to the mortgage lender and having no asset to back up that liability. If your spouse is going to keep the home, then once you know the mortgage has been refinanced, then you can sign the Quit Claim Deed.
You Can Stay On One Mortgage And Qualify For Another
It is very common for divorce agreements to state that Party A will take ownership of the home with sole responsibility for the mortgage, taxes and insurance and has so many months in which to refinance. Written in the right way means that Party B now has a “contingent liability” for the mortgage and Bruns says that most lenders are not required to count that debt in assessing Party B’s eligibility for a new mortgage.
And … these provisions also usually provide that if Party A does not refinance within the specified time period, the property is to be sold which offers Party B some assurance that this is not an indefinite commitment.
You Can’t Refinance While Your Divorce Is Pending
Once your divorce has been filed, most mortgage lenders will not close on a refinancing until the divorce decree is issued. So you have two choices – do it before you file or wait.
Refinancing before you file is very common. Lots of couples are anxious to get their affairs separated and to take care of the business of divorce. But it’s risky for both parties because the division of all your liabilities and assets is never final until the divorce is final. It comes down to the degree of trust you have in your spouse, and the interests each of you have in keeping to your informal agreement. Even if you have it all written down and documented, chances are it can still be challenged in court.
If you’ve filed you can start working with a mortgage lender, understanding their qualification requirements, making sure your divorce agreement will meet their needs and finalizing the terms of your mortgage but you won’t be able to close until you’re officially divorced because … everything can change during negotiations.
Do You Want A Cash Out Refinance Or An Equity Buyout
Turns out not all refinancing is the same.
A Cash Out Refinance is when you withdraw equity and the mortgage lender asks no questions about how the money is being used.
An Equity Buyout is when equity is withdrawn and it is paid in totality to one party on the mortgage. Equity buyouts usually have the lowest interest rates and are only available where divorce has been filed. You cannot withdraw any additional equity to help pay for other expenses such as legal expenses or a new roof. Every single penny of the Buyout must go to the receiving spouse.
Bruns says that interest rates on Cash Out Refinances are often 0.25 percent higher than on an Equity Buyout. That may not seem like much but on a mortgage of $300,000 for 30 years that adds up to a lot of money.
Unfortunately you can’t assume your mortgage lender is going to know the difference between these two options. “This is the number one lender error when working with divorcing clients,” Bruns says.
Don’t Forget About The Escrow Refund
If your mortgage is being refinanced or paid off with the sale of your house, then there will be a refund of whatever is in the escrow account. That refund will come some time after closing and the tricky part is that the refund check will be made payable to whoever was named on the mortgage. So if you and your spouse were on the mortgage together, the refund check will be issued to you together.
Bruns says, “Nobody ever really thinks about it and that’s why it becomes a contention afterwards.” To try to avoid problems, you’ll want your divorce agreement to specify how the escrow refund is to be allocated and to require that you both cooperate in endorsing the check so it can be cashed.
Your monthly mortgage statement includes how much is in your escrow account but know that this amount will likely change before closing especially if there’s a disbursement to pay property taxes. For this reason, any agreement you make as to how the escrow refund is to be shared should be in percentage shares rather than specific dollar amounts.
Not All Income Is Qualified Income
There’s a difference between “Income” and “Qualified Income” and this is where people often get tripped up because this affects spousal support and child support. Only Qualified Income is considered for a mortgage.
You have to show that you have received child and/or spousal support for at least six months for it to be considered Qualified Income. Not only that, you also have to demonstrate that the support is payable for a further three years from the date of loan application.
So, if for example, your agreement says you’re going to receive spousal support for 42 months, this could be problematic because if you have to wait 6 months before applying, it’s going to be paid for exactly another three years and this leaves you no wiggle room in case your loan application gets rejected or delayed.
Payments also have to be court-ordered. So let’s say you’ve been receiving regular child support since you separated six months ago and you have a Support Order showing on-going payments. That should count as Qualified Income, right? Well, maybe not. If your ex was paying the child support voluntarily before your divorce was final, mortgage lenders may not count that. If you had a temporary order from the court mandating your ex to pay, then you are on much more solid ground.
You’ll want to watch out for these requirements especially if your settlement agreement requires you to refinance within a certain time frame. The danger is that you may find yourself backed into a corner where it’s impossible to qualify for a loan and the separation agreement dictates that the property has to be sold. Arrgh!
Bruns cautions that it is not your attorney’s job to know mortgage guidelines and that’s why it’s important for you to consult with a mortgage professional early on in your process. This is not a typical mortgage transaction and you’ll want to make sure that both the terms of your settlement agreement and the written language facilitate qualifying for a mortgage.
Jody Bruns is a senior mortgage consultant with new American Funding. She is the creator of the Certified Divorce Lending Professional certification program which she developed as a result of seeing many errors made by lending professionals in handling their divorcing clients. You can find a CDLP near you using the locator tool at the Divorce Lending Association.