Divorce involves complex decisions regarding the marital home and real property. Agreeing on how to handle the mortgage and the family home can be a challenging aspect of this process. The options available to divorcing homeowners depend on several factors, including how the property was financed and its current ownership status. Additionally, considerations like property disposition, equity in the property, and the income sources available to the spouse seeking a mortgage come into play. In this situation, it’s important to work with a loan officer who specializes in divorce lending.
Common mistakes often arise during divorce when working with mortgage professionals who may not fully understand the unique implications of divorce and the opportunities to assist divorcing homeowners with their mortgage financing. In this blog post, we’ll discuss two of the most common mistakes made and offer solutions to help divorcing couples navigate this financial aspect more effectively.
Mistake #1: Mismanaging Home Equity Distribution
When a divorcing couple has equity in their home, the spouse retaining the house often faces the dilemma of how to pay their ex-spouse their rightful share. One common misconception is that the solution lies in a cash-out refinance. This approach typically involves initiating a cash-out refinance to provide a portion of the money owed to the exiting spouse, followed by obtaining a home equity loan to cover the remaining amount.
However, there’s a more advantageous solution allowed by mortgage underwriting guidelines. By including specific language in the marital settlement agreement, the refinancing can be classified as an equity buyout rate and term refinance. The benefit of this approach is twofold: it provides access to more home equity, which is usually limited to 80% loan-to-value in cash-out refinances, and it often comes with better financing terms. It’s important to note that there may be title seasoning requirements for the borrowing spouse, so consult with a mortgage professional well-versed in divorce-related financing.
Mistake #2: Leaving an Ex-Spouse’s Name on the Existing Mortgage
Failing to remove the vacating spouse’s name from the existing mortgage can have significant consequences. It affects the ability of the non-resident spouse to qualify for future mortgage financing because the existing mortgage payment is counted in their debt-to-income ratio if they remain on the current mortgage.
To mitigate this, the marital settlement agreement should explicitly assign responsibility for paying the existing debt. This assignment classifies the debt as a court-ordered assignment, which, in the eyes of mortgage financing requirements, may allow the debt to be excluded from the borrower’s debt-to-income ratio. This, in turn, can help them qualify for a new mortgage in their name only, while still remaining on the existing mortgage for the marital home.
Divorce is undoubtedly a challenging process, and the financial implications of decisions made during this time can be long-lasting. Avoiding common mortgage mistakes during divorce is crucial for both parties’ financial stability. By understanding how to manage home equity distribution effectively and ensuring that mortgage responsibilities are clearly outlined in the marital settlement agreement, divorcing couples can navigate the mortgage aspect of their divorce more smoothly and secure a brighter financial future for themselves.