As a divorce mortgage planner, a CDLP™ is often brought in to work with a client who is going through a divorce. Typically, one of the divorcing spouses would like to retain the marital home while the other may wish to purchase a new home. Here is a list of 5 things you should know about getting a mortgage either during or after the divorce. Divorce mortgage planning is very different than traditional mortgage lending and you will be better served working with a Certified Divorce Lending Professional (CDLP™) who has the required background knowledge of divorce.
#1. Timing of Filing Divorce Petition
The timing of filing a divorce petition with the court has a direct impact on mortgage financing. When a petition for divorce is filed, most mortgage lenders will require a finalized divorce settlement agreement ordered by the court in order to complete and close a new mortgage application and/or loan.
Why? Because many things can change during the course of the divorce process and when maintenance and/or child support are part of the settlement it has a direct impact on either the debt load or the income stated in the mortgage application. The same applies to marital debt and when one party will be ordered as responsible for the payment of that debt—it also has a direct impact on the mortgage application.
#2. Contingent Liability
Often times in a divorce situation the divorce 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 if the court orders one party responsible for the payment the debt is now 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.
The most common instance in a divorce situation is with current mortgage financing. If the court orders one party responsible for the mortgage payment on the marital home, the current mortgage debt is now considered a contingent liability and may be omitted from the debt to income ratio for the other party when seeking new mortgage financing. This contingent liability rule is the same for mortgages, installment loans, credit cards, etc.
#3. 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.
In order to utilize maintenance and/or child support as income for mortgage financing purposes, each source must meet the ‘6/36’ rule. In most cases, you must be able to provide documentation showing receipt of this income for the previous 6 consecutive months. Additionally, at the time of mortgage application, there must remain 36 months of future payments due to you. Otherwise, this portion of your actual income can not be considered as income for mortgage financing purposes. Likewise for income from a property settlement note—you must provide 12 months of proof of receipt as well as 36 months of future payments due you.
#4. Equity Buy-Out
In a divorce situation when one spouse is required to refinance the marital home to give the vacating spouse a cash settlement for their share of equity in the marital home—it is considered an “Equity Buy-Out.”
There are a couple of mortgage financing guidelines to take into consideration in an Equity Buy-Out situation.
- The Divorce Settlement Agreement should state the dollar amount and/or percentage of equity the vacating spouse is to receive. The benefit to you is that when the Equity Buy-Out is stated in the Divorce Settlement Agreement, you may receive a lower interest rate and avoid a “Cash Out” refinance which carries a higher interest rate and lower loan to value ratios.
- The entire amount of equity taken out of the home must go directly to the vacating spouse at the closing of the new mortgage. No cash in any amount can go directly to you or it will not be considered an Equity Buy Out but rather the Cash-Out Refinance mentioned above.
#5. Appraised Value / Appraisal
When divorcing, should you obtain an appraisal or a Comparative Market Analysis? What’s the difference?
Obviously, assessing the value of the marital home and other real estate owned in a divorce is a big deal in the settlement process. The question is how to best determine the value?
The two most common methods for obtaining the value of real estate are obtaining an appraisal from a licensed appraiser or having a real estate professional provide a CMA— but what’s the difference between the two? To start, both methods are an opinion of value and no two will ever give you the same value. The primary difference is perspective.
- An appraisal is completed by a licensed residential appraiser who bases their opinion of value off of recent comparable home sold sales data.
- A Comparative Market Analysis (CMA) is completed by a licensed real estate professional who bases their opinion of value on what the property may potentially sell for in the current real estate market.
While both opinions of value are valid, it is important to understand the perspective of each opinion and how the two methods apply to the current situation of the marital home. When considering the option of one spouse retaining the marital home and refinancing, an appraisal may be the better option. If considering a sale of the marital home, a CMA may be a better option.
Do you have questions about how divorce can impact the ability to obtain mortgage financing? A Certified Divorce Lending Professional’s (CDLP™) knowledge and experience can help make the transition much smoother and successful for all parties involved.
The CDLP™ brings tremendous value to the divorce team during the settlement process because of their stronger knowledge, perspective, and experience of the entire divorce process. Their understanding of the intersection between family law, tax law, real estate, and mortgage financing truly separates them from other mortgage professionals in the industry.
Certified Divorce Lending Professionals have a completely different perspective when looking at a divorce settlement agreement and participating in the actual settlement or mediation process with the remainder of the professional divorce team. CDLP™’s don’t look at the divorce settlement agreement and how it applies to the borrower’s mortgage application. They have a much wider viewpoint and understanding of the entire process – a deeper and stronger perspective of the overall impact divorce has on the divorcing borrower.
“Nothing matters more in winning than getting the right people on the field. All the clever strategies and advanced technologies in the world are nowhere near as effective without great people to put them to work.” – Jack Welch, Winning
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice.
If you need home financing or have any questions about the lending process, please visit our website and contact us today for more information.