Divorce: How it Affects Mortgages and Real EstateDaniel Dobbs2023-05-25T13:17:39-07:00
For legal opinions, you should see the advice of an attorney.
How divorce affects a couple’s ability to borrow, and buy another home, we’ll be consulting Fannie / Freddie FHA and VA guidelines for different lending situations.
During the Great Recession (and the countless short sales – loan mods), I often encountered “legal beagles”, who was only too happy to tell me about lending.
Get the Lowest Interest Rate, Fees, and Fastest Service
YouTube – Straight Talk Lending – Daniel Dobbs
My favorite response was (and still is) “Council if you promise not to practice lending; I promise not to practice law.”
Seldom was that quote well received!
Here’s what we know from the last real estate crash:
A pending divorce increases the likelihood by 50% that a couple’s property will come onto the market within 12 months.
Those unfortunate souls will need an agent to guide them thru the home selling process with a minimal amount of chaos.
How they exit the property (on good terms vs. bad terms with each other) will determine how fast they go on with their lives and how well the children( or other family members) HEAL!
Here are 9 underwriting rules that will affect how a divorce (and a separation) will affect both spouses.
1) A divorcing spouse can quit-claim off the title, but NOT “off the loan.”
TRUE
The only way a spouse can get “off a loan” is with a full refinance.
Many spouses believe they are “off the hook” once they are off the title, but that is not the case; both spouses are obligated to pay the mortgage, whether they are on the title or not.
If a former (or so to be) spouse goes into foreclosure / misses payments, the other spouse’s credit is damaged, and their ability to buy a home will be crippled.
2) If a spouse wants to buy a new home before their divorce is finalized, the non-buying spouse must sign a quit-claim.
TRUE. Otherwise, the transaction will blow up if the contentious spouse refuses to sign a quit-claim abandoning any right to their (soon to be) former spouse’s future property.
A buyer (former spouse) can use child support and alimony payments to3) qualify for a refi or purchase of another home.
TRUE! – BUT: Only if there is a court-ordered payment plan, and that plan has to have a 6-12 month history of past payments.
A history of “voluntary” (not court-ordered) payments will not be counted as income.
4) The support payments (alimony/child support) must go forward for 3 years (or more) from the day the loan funds.
TRUE!
For example, if a spouse only gets child support that will end when the kids are 18, we cannot use the income if the children are between the ages of 15 and 17.
5) Once lenders find out about a pending divorce, transactions cannot close until they receive a court-approved settlement
TRUE.
Also of note; once that lender discovers the buyer has been “less than forthcoming” (hiding the divorce); they will cancel the loan because not disclosing a divorce is in progress (on the application), is a fraud.
(consult page 4 on the 1003 if there’s any doubt in your mind)
The lender then labels the loan package as fraudulent and “black balls” those borrowers from resubmitting the loan back to the very same lender!
Often, when borrowers try to hide divorces, in the age of electronic information, that’s usually a deal buster.
For example: If one spouse suddenly “quit claims off the title,” that will raise a red flag.
So will a large amount of “cash out” being taken from a refinance.
And if one spouse has a different address on a driver’s license (or any other official document), then expect to get the “CSI” treatment from the underwriter.
Concealing any material fact from a federally licensed lending institution is FRAUD. Because the FEDS say so!
7) Divorces can be “fast-tracked.”
TRUE. One option for the spouses seeking a “quickie” divorce is to hire a private judge to expedite settlements to close mortgage / sell a home sooner.
Expedited settlements are often necessary to close a transaction.
The need can arise when marital debts are excessive, when support obligations or benefits are unknown (and underwriters need to know), or when a spouse refuses to quit-claim.
On a personal note: I have no children (so that makes me an expert on yours – lol), but it’s been my experience that when marriages have children, “fast-tracking” a divorce isn’t possible. Please consult your local attorney!
8) “Pulling cash out” (from a refinance) means a higher rate to the borrower!
Typically TRUE! But not for a divorce proceeding! On a “high note”: Increasing a mortgage’s loan amount to “buy out” a spouse; the proceeds are not then considered “cash out.”
If any other of the refinance’s proceeds are deemed “cash-out,”; typically, the interest rate is .125% higher,
9) Spouses must account for all marital debt when qualifying unless there is a court order or decree explicitly stating which spouse is responsible for which debt.
FALSE: A judge can not release either spouse from contracts, when debt is in both of their names.
Concealing debt on a loan application is a fraud. Period.
The best way to complete a refinance is to pay off all joint debt with the proceeds of the loan THROUGH ESCROW.
In other words, 1 spouse should NOT trust the other spouse to write the checks.
The same goes for the sale of a home. Escrow should be the one that pays off the joint debts to avoid conflict.
In Closing!
I’ve been on both ends of this “divorce thing.” My wife and I were cordial and couldn’t wait to get un-hitched, (so we could go forth and seek out to 2 innocent people to screw up their lives! LOL)!
Several times, I’ve been a lender to close friends when one was buying out the other.
It was a living hell; not only was my friendship / professional reputation with both of them on the line but so was it with other members of our social group (10-12 persons).
Everything turned out ok but it was a wild emotional ride and FYI- IF you don’t care, dislike or hold in utter contempt one of the spouses you may want to pass on the transaction!
Also, it is not easy to be “PERCEIVED” by both parties during the entire transaction (truly) neutral.
It’s virtually impossible unless you sit down with both parties before the “crazy sets in” to have the “talk.”
So, before the actual divorce occurs, your written recommendations have to be acknowledged by both parties (preferably in some form of writing (i.e., email texts, etc.). When emotions run high
Share everything with both parties immediately in a joint hotel, and ONLY your professional assessments, while staying optimistic and stressing the positive.
Don’t refer to the house as “your home.” Refer to it as “the property.”
And don’t go out drinking or engaging in any other mind-altering / emotionally charged activities.
You’ll regret it. Even Ray Charles could these problems on the horizon!
Should readers have other “situations” I haven’t covered, please email me to build this post into a more significant article.
