Whether home ownership is divided by a court or agreed to in settlement, the decision over how to assign its value and divide the dollars is not the only consideration that matters. Post-divorce, there are often problems that could have been assessed and possibly dealt with earlier.
Settlements and court orders can include instructions and deadlines for exchanging Quit Claim Deeds (QCD) and Real Estate Excise Tax Affidavits (REETA) in order to remove one spouse from the title of a property. However, if the mortgage itself is going to remain intact, neither of those documents is going to remove a spouse from a mortgage on a property they no longer own.
Since interest rates have recently risen quite dramatically, some property owners are going to be highly motivated to keep the current low interest rate on the mortgage and find a different mechanism for providing cash transfers to the spouse leaving the property. For some owners, their mortgage company may allow an “assumption” of a mortgage to one of the owners, but that information should be explored ahead of time and is by no means assured.
One idea for solving some key issues in real property division is to bring a mortgage lender into the process early. A knowledgeable mortgage lender can help assess three specific and important areas of information:
- Confirming credit implications for each party.
- Clarifying the financial situation and determining if the home can be kept or must be sold.
- Determining if one of the spouses can qualify for mortgage lending on their own income and credit profile.
Credit Issues
If there are credit problems and large amounts of revolving debt, or old debts hanging around lowering the credit score of one or both spouses, that could severely hamper one or both of the spouses from qualifying for new loans.
Using One Spouse’s Financial Income to Keep the House
In many cases, one spouse will want to keep the home (the “house spouse”) while the other (the “out spouse”) will vacate. If your client wants to keep the house, a mortgage lender can help you explore options for refinancing the home in their name alone. This can be challenging if the “house spouse” doesn’t already have a steady source of income and current employment history. Spousal and child support alone may not suffice. Lending guidelines are not intuitive.
Consider that Fannie Mae and Freddie Mac underwriting guidelines require a minimum history of six months of actually receiving support payments before they are considered stable income for loan-qualifying purposes. Clearly, that can impact timelines in a separation/divorce agreement. And the support must be shown to be ordered or agreed to continue for at least three years before underwriting will consider it ongoing.
For example, if a child is older than 14 at the time of the settlement, underwriting likely will not consider child support as a viable, ongoing income stream for loan-qualifying purposes. A good lender can guide you through those calculations and considerations before reaching a final agreement.
Assessing the House Value
Assessing the value and viability of real estate assets, post-divorce, is complicated. A mortgage lender can help evaluate the fair-market value of the property, along with the equity in the estate. What is a fair and equitable division of that equity? Can the equity be accessed without selling the property? Doing so will most likely require a “cash-out refinance” to tap into the equity locked in the property. A lender can review these numbers and calculate the best approach to accessing the property equity.
A mortgage lender can determine whether the “house spouse” has the income and employment history necessary to keep the home, if that is the desired result, or if the home must be sold. Just because the parties agree to certain outcomes and sums doesn’t mean the lending world will find those arrangements sufficient for one of the parties to keep the family home and qualify for financing solely on the merits of their income and employment history.
Severing Financial Entanglements
As mentioned, recording a QCD or other legal transfer of ownership does not in and of itself remove either party from the mortgage obligation. If both signed the note and deed of trust, both parties are still technically obligated for the entire debt. A new loan must be originated via a refinance to remove one of the parties and absolve them from further mortgage obligations.
Until that occurs, or the property is sold and the original debt is retired, any missed mortgage payments (whether intentional or accidental) will severely impact both parties’ credit profiles. For example, one 30-day-late mortgage payment can decrease a credit score by more than 100 points. Recurring late payments for 60 days, 90 days, or longer can destroy a person’s credit rating. Fixing this would require many years to lapse before the late payments “fall off” the credit report.
The negative impact of a poor credit rating can have major implications throughout a person’s financial and professional endeavors. Furthermore, for the “out spouse,” having a mortgage debt obligation on their credit report—even if timely payments are made by the “house spouse”—can disqualify them from future home purchases. The reason for this would likely be a debt-to-income ratio that is too high for lending guidelines due to the previous home loan obligation still appearing on the credit report. A mortgage lender will help plan a course of action to protect each party and their credit worthiness going forward.
If neither the divorce settlement nor the court orders are clear enough, issues of mortgage lending and real property division, and miscalculations, could follow the parties for years after the divorce is finalized. One option is to consult a qualified, knowledgeable mortgage professional well in advance of any final resolution.
