Going through a divorce can be an emotionally difficult and legally complex journey. Amidst all the challenges, it’s important to understand how a divorce can impact your decisions about buying a home. Today, we’ll explore the connection between divorce and mortgages, highlighting eight important aspects that could significantly impact your financial well-being, your credit, your ability to refinance, and your homebuying journey after divorce.
1. The Tie between Title Ownership and Mortgage Liability
People often think that removing a name from a property’s title frees them from the mortgage obligation. This is a myth. The mortgage and title are separate. Even if you’re not on the title, you are still obligated to make your mortgage payments if your name is on the loan. The only way to fully eliminate your mortgage obligation is by refinancing the mortgage into someone else’s name entirely.
2. Acquiring New Property Amidst Divorce Proceedings
If one spouse plans to buy a house or new property before the divorce is finalized, the other spouse, who is not buying a home, must sign a quit-claim deed. Lenders require this to ensure the non-buying spouse can make no claims for or against the new property. Because of this requirement, it is beneficial for divorcing spouses to remain cordial; if a divorcing spouse cannot obtain a quit-claim, she will not be able to get financing for her new home until after the divorce is finalized.
3. Spousal Support as Income to Qualify for a Mortgage
Using spousal support income to qualify for a mortgage requires a court-ordered payment history of some sort including marital settlement agreements or divorce decrees. Fannie Mae and Freddie Mac need a six-month history while the Federal Housing Administration (FHA) requires a 12 month history. Voluntary payments that are made without court orders typically don’t meet these requirements.
4. The Three-year Rule for Spousal Support
Lenders typically require a three-year guarantee of future spousal support payments within the divorce decree before that income can be used to qualify for a mortgage. This ensures that the income will last long enough to help cover the mortgage payments for a sufficient period of time, from a lender’s perspective. For example, lenders cannot use child support income to help qualify someone if the child, for which the support is received, is 16 and the child support ends when the child turns 18, as that source of income will clearly last less than three years.
5. Private Judges: An Expedient Option
In certain situations, divorcing spouses can hire private judges to expedite formal settlements in order to close mortgage transactions sooner, if necessary. This might involve additional cost, but it is often not as much as many people expect (under $1,000 in some cases). Expedited settlements are often necessary when lenders are aware of a divorce and require a final settlement before they will close a transaction that needs to close within a short time frame. Expedited settlements are also required when one spouse refuses to quitclaim, as discussed above.
6. Buying Out The Other Spouse’s Share
If a spouse wants to buy out the other spouse’s share of a property, the amount of the mortgage can be increased via a refinance without the lender deeming the larger/new mortgage “cash out.” This is significant because “cash out” loans have higher interest rates and much stricter loan-to-value limits or equity requirements.
7. Accounting for Marital Debt During Mortgage Qualification
When qualifying one spouse for a mortgage, lenders will usually take all marital debt into account – unless there is a court order, decree or martial settlement agreement that specifically states which spouse is responsible for which debt. For example, if a credit card is in both spouse’s (or ex-spouse’s) names, but only one spouse uses the card and makes payments, the other spouse will have to include that debt on her mortgage application unless the divorce decree specifically states that the spouse who is using the card is solely responsible for that card.
Understanding Property Appraisals
It is a common practice to obtain property appraisals during divorce proceedings. In contentious proceedings, spouses will sometimes obtain two appraisals for the same property and then use the average of the two value estimates. Appraisals provide objective estimates of value to help divorcing spouses asses the amount of equity that needs to be divided in the divorce proceedings. If you are in need of an appraiser, please contact JVM Lending, as we work directly with many and can often provide highly qualified recommendations.
Impact on Credit Scores
A divorce itself doesn’t affect credit scores. However, joint accounts, unsettled debts, and late payments can impact credit scores. As a result, we like to remind divorcing parties to separate all joint accounts to ensure their credit is not adversely impacted by the actions of their ex-spouse.
Buying A Home During A Divorce
Buying a home during a divorce can be complicated. Here’s what you need to know:
- Financial Considerations: Understand your post-divorce budget and consider factors like single-income living, alimony, child support, and who will pay the mortgage.
- Mortgage Approval: Lenders will scrutinize your credit score, debt-to-income ratio, and income stability.
- Claim to the Property: To avoid issues, your soon-to-be ex-spouse may need to sign a quitclaim deed.
- Emotional Well-being: Take care of your emotional well-being and make large decisions, like buying real estate, for the right reasons.
- Future Changes: Consider future changes like job relocations or downsizing.
- Professional guidance: Seek professional guidance from experts when evaluating the disposition, acquisition or financing of real estate during a divorce proceeding.
Understanding these points and seeking professional help will make the process smoother. Take your time and make the best decision for your new beginning.
Most importantly, we are experts here at JVM Lending when it comes to divorces and mortgage financing. Please do not hesitate to reach out to us at (855) 855-4491 if you have any questions at all.
Buying A Home After A Divorce
Homebuying after a divorce requires careful consideration. Here’s what you need to know:
- Financial independence: Assess your new financial situation, accounting for single income and any alimony or child support payments.
- Credit health: Check your credit report early on and address any issues to improve your credit score.
- Mortgage qualification: Understand how alimony or child support payments, both received and paid, can impact your mortgage qualification for a new home loan.
- Future needs: Consider your new lifestyle and requirements when choosing a home.
- Emotional readiness: Make sure you’re emotionally prepared for the commitment of homeownership.
- Legal matters: Refinance the mortgage if you’re keeping your former marital home, and resolve any ties to old properties when purchasing a new home.
- Professional guidance: Seek advice from real estate agents, mortgage advisors, and financial planners with experience in post-divorce situations.
Take these factors into account to make a well-informed decision as you start a new chapter in your life.
Frequently Asked Questions
To help you further, we have compiled answers to some commonly asked questions about mortgages and divorce.
1. Can I remove my name from the mortgage after a divorce?
To remove your name from the mortgage, a full refinance is typically required. Being removed from the title does not absolve you from mortgage obligations.
2. How does spousal support income affect mortgage qualification?
To count spousal support income towards mortgage qualification, lenders generally require a court-ordered payment history and typically three years of future payments.
3. Can I buy out my spouse’s share of our home without refinancing?
The process of buying out your spouse’s share of the home often necessitates refinancing to accommodate the increased mortgage amount. However, this is not considered a “cash-out” transaction if all cash proceeds go to the spouse being bought out.
4. Do I need to consider marital debt when qualifying for a mortgage?
Yes, unless there is a court order or decree stating otherwise, both spouses must account for all marital debt during the mortgage qualification process. Ignoring this could affect your ability to qualify or influence the terms of your loan.
These answers should help clear up any initial questions or concerns you may have about divorce and mortgages. Remember, it’s always recommended to seek professional advice for a better understanding of your specific circumstances.
Armed with a comprehensive understanding of how divorce affects your mortgage and real estate decisions, you can effectively navigate the complexities of home buying post-divorce. Don’t hesitate to seek professional assistance from experienced mortgage lenders, like JVM Lending, who are familiar with the intricacies of divorce proceedings, and attorneys for personalized guidance. The challenges may seem daunting, but with informed decisions and expert advice, your real estate goals are within reach.