Divorces & Problem Spouses Can Really Complicate Mortgages; Rules To Note

I. When to Punt a Spouse From a Loan

Lenders often “remove” one spouse from a loan – when doing so helps with rates or a higher purchase-qualification amount.

1. Low Credit Score: If one spouse has a low credit score that is impacting the interest rate, lenders will remove that spouse if the remaining spouse can qualify on her own.
2. No Verifiable Income: If one spouse has no verifiable income but enough debt to push debt ratios too high, lenders will often remove that spouse.
3. Title Only: Even when a spouse is not on the loan, he can still be on title.
4. FHA Counts Weak Spouse’s Debts No Matter What: Conventional guidelines allow lenders to ignore a spouse’s debts for debt ratio purposes if that spouse is not on the loan.  FHA, however, makes lenders count both spouses’ debts against debt ratio purposes whether both spouses are on the loan or not.

II. Be Ultra Careful if Your Clients Are Getting a Divorce!

1. A divorcing spouse can quitclaim off title, but NOT off the loan. The only way a spouse can get “off a loan” is with a full refinance. Many spouses mistakenly believe they are “off the hook” once they are off title, but that is not the case; spouses are obligated to pay the mortgage whether they are on title or not in most cases.
2. If a spouse wants to buy a new home before the divorce is finalized, the non-buying spouse must sign a quitclaim. Hence, it is important that the spouses are “cordial” before one spouse starts house-shopping. Otherwise, the deal will die if an unfriendly spouse refuses to sign the quitclaim. If the parties have a finalized separation agreement, taking title as a single individual may be possible when targeting conventional financing.

   Note too that if one spouse is buying a new home with owner-occupied financing, it needs to “make sense.” If she is buying a much smaller home for example, lenders will ask for explanation. If there is not one other than a deal-killing divorce, the spouse may have to opt for non-owner financing.

3. We need a court-ordered payment history before we can use spousal or child support income of any kind (including alimony) for conventional financing. FHA financing is more flexible. Fannie, Freddie, and FHA all require six months of receipt. A history of voluntary (not court-ordered) payments will not work in most cases.
4. We need three years of future payments before we can use child support to qualify. For example, if a spouse only gets child support that will end when the kids are 18, we cannot use the income if the kids are 16 and 17.
5.  Once lenders find out about a pending divorce, transactions cannot close until they receive a court-approved settlement agreement. Sometimes borrowers try to hide divorces but that opens up questions as to why they want cash out, or are buying another home.
6. Divorcing spouses can hire private judges to expedite settlements in order to close mortgages sooner. This can cost as little as $500 in some cases. Expedited settlements are often necessary simply to close a transaction when marital debts are excessive, when support obligations or benefits are unknown (and underwriters need to know), or when a spouse refuses to quitclaim.
7. Increasing a mortgage to buy out a spouse is not considered “cash out” as long as all cash proceeds go to the spouse getting bought out. This rule allows for higher loan-to-value limits and better loan terms.
8. Spouses must account for all marital debt when qualifying unless there is a court order or decree specifically stating which spouse is responsible for which debt.