Navigating a Mortgage During a Divorce

Navigating the divorce process requires a true understanding of all lending guidelines, products, and programs available in the market to assure the most desirable outcome for all involved parties. 

Clients who wish to retain the marital residence by way of buy-out and refinance, as well as clients who wish to purchase a new home as soon as the divorce is entered, must recognize what will be taken into consideration by the various lending agencies. Advance knowledge allows for advance preparation, creating the opportunity for each party’s goals to be achieved as pertaining to the home. 

Fannie Mae Income Guidelines for Alimony and Child Support

Documentation confirming that child support or alimony will continue to be paid for at least three years following the date of the mortgage application must be provided for either to be used as qualifying income. 

Fannie Mae requires confirmation of the age of all children to determine the duration of child support payments. Receipt of support payments must be no less than six months, meaning that most individuals will need to wait a minimum of six months following a divorce to consider support and alimony as income. 

Reasons to Refinance After a Divorce: Remaining in the Marital Home

New Circumstances Require a Refinance

If one party is looking to retain the marital home, a refinance may be the best option. The remaining party will need to qualify for the new loan using only their income and assets. 

Take Cash Out

A cash-out refinance splits assets between the two parties. If one party wishes to keep the marital home, they could receive money from the equity to pay the departing party for their share of the home. 

Reasons to Refinance After a Divorce: Departing the Marital Home

Purchase a New Home 

The party without ownership interest in the home can have their name removed from the mortgage via a refinance. Getting removed from the home loan will lower their debt-to-income (DTI) ratio, making it easier to secure a loan with a fair interest rate for a new home. 

Release of Responsibility

Removing the departing party from the mortgage ensures they are not held responsible for the payments. If the remaining spouse misses or is late on a mortgage payment, the departing party’s credit score will not be affected because their name is no longer associated with the loan. 

What to Consider When Purchasing a New Home After a Divorce

1. Is your name still on the mortgage for the marital home? The home will need to be sold or refinanced to release you from being responsible for the mortgage payments. Remaining on the mortgage can affect your credit, debt-to-income ratio, and what types of loan programs are available to you.
2. What does your income look like? All borrowers must meet specified income requirements, including those for alimony and child support, when applying for a home loan. There are a variety of loan programs to help find home financing solutions for varying incomes.
3. Do you have the assets you need to secure a mortgage? Most loan programs require borrowers to have a certain amount of money in reserves. The exact amount of cash reserves required depends on the loan program, but a good guideline is two months’ worth of principal, interest, taxes, and insurance costs.
   

Closing Thoughts

Real estate is one of the biggest investments couples make together. When a couple divorces, this investment needs to be settled. 

The decisions made today set the groundwork for tomorrow. Having a mortgage professional to assist your clients when navigating their home loan during a divorce ensures that expectations remain realistic and subsequent financing remains reliable.