Although divorce rates are reported to be declining, many marriages still end in divorce. Most people know that a divorce can be emotionally draining, but they don’t always realize how financially draining a divorce can be on both parties.
One of the biggest decisions to make while going through a divorce is what will be done with the family home. This is not just a financial decision, but also can be an emotional and logistical decision as well. Do children need to be kept in the same school district? Will family memories be comforting or upsetting? Will remaining in the family home cause less change and stress for children? These are all things to consider while making this decision.
The cleanest and least complicated decision is to sell the home and the parties divide the equity between them. They can then take that equity to move forward and purchase another home or decide to rent. There is also the option of one party keeping the home and refinancing the other party off of the loan and title to the home. This can be done with an owelty lien which I explained thoroughly in my last blog. With this option, the party keeping the home needs to qualify to refinance on their own and the other party can move on to rent or buy.
Whether one of the parties chooses to buy a new home or refinance the home they are in, they need to get pre-qualified for the loan. Prequalify for a refinance?? That is not something common in the mortgage industry. Here is why it is so important: Let’s say John and Mary are divorcing and Mary has decided to keep the home so her children can stay in the same school district. She plans to refinance him off of the current loan and pay him the equity he is owed with an owelty lien. John plans to use the equity to put down on a new home. This is clearly written in the divorce decree and Mary has 6 months to finalize the refinance. Three months after the divorce is final, John is under contract on a new home and Mary is in the process of refinancing. She is declined by several lenders because she has not received her child support and alimony long enough to use it as qualifying income. Since Mary cannot qualify for the refinance, there is no way for John to get his equity from the home. The other problem is he is still on the mortgage to that home and he is not able to qualify with both mortgages included in his DTI. SO although this decision was made and clearly ordered in the decree, we now have two parties who cannot qualify for their mortgage and John and Mary are stuck.
How do we avoid situations like this from occurring? This is where prequalifying for a refinance comes into play. Both John and Mary should be prequalified for their mortgage transaction before the divorce is final. This would allow both parties to understand the timeline of approval and work on overcoming any issues before the decree is written and finalized. If Mary met with a lender in the early stages of divorce or even before filing, there are ways they could have overcome the issue of child support and alimony receipt. If the attorney knows this income is needed to qualify, they can write a temporary order where John would start paying Mary child support before the divorce is final instead of paying other bills (for ex; the mortgage or monthly bills) . This would allow her to show a longer period of receipt so she could use this as qualifying income. This can also be done with spousal support. Generally speaking, we must show 3 months receipt for a FHA or VA loan, 6 months receipt for conforming loan amounts (under $484,300 in Texas) and typically 12 months receipt on most jumbo loans (over $484,300 loan amount) Some jumbo investors will allow 6 months but the majority require 12.
There many other issues that can keep recently divorced borrowers from being able to qualify for a loan but there are also many solutions for these issues as long as the attorney, client and lender work together before the divorce is final. Situations like these make it very important to work with a Certified Divorce Lending Professional (CDLP) who specialize in divorce lending. The CDLP can strategize with the attorney and client to make sure the client is set up for success whether they have decided to refinance or buy.