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MORTGAGE 101 BLOG

By Mike Miles

Mike Miles is one of the owners of Fountain Mortgage. 

August 27, 2019

Quick Note: There is a fantastic opportunity to learn more about strategically planning, financially and emotionally, for divorce (and other big life transitions) at an upcoming event sponsored by Fountain Mortgage on Thursday, September 19. This educational seminar will be presented by Julie Holmquist, Esp., CPA, and mediator and Ginger Rothhaas, MDiv, MBA, and CompassionFix.com. Click below for full details and to register.

YOU’RE WORTH IT: Strategic Planning for Life’s Transitions

It’s an unfortunate part of life, but it happens … divorce. 

It’s a major life event. In most divorce situations, there is a division of many things including assets and liabilities. When those assets and/or liabilities include a house and a mortgage, it’s easy for both parties to feel unsure about what’s supposed to happen and how to manage it. It’s normal to have many questions. Such as:

•    How do I remove my ex from the mortgage loan?
•    Can I qualify to keep this house?
•    Can I qualify to get a new house?
•    What happens to the equity that was built together?

For the purpose of today’s post … we will keep it brief and tackle these questions in no special order. 

Removing an ex-spouse:

A final divorce decree is signed by a judge and this document identifies who is to remain in the house and who isn’t. The only way to remove a spouse from a jointly held mortgage is to refinance the property. Lenders cannot simply remove a borrower from a loan that was closed at some point in the past. The person keeping the house will have to re-qualify for a new loan on his/her own. The divorce decree usually requires this to be done within the 12 months following the divorce. In the meantime, the exiting spouse will sign a quit claim deed removing his/her ownership interest in the house.

What happens to the equity:

This depends on what the decree says, but in most situations, the equity is to be shared. The person keeping the house will have to pay the exiting spouse their share of the equity. This payment can come from any assets. These amounts can be substantial, and in many situations the equity buyout payments happen by doing a refinance by the person keeping the house (see above). Lending guidelines allow equity buyouts to be considered rate and term instead of cash-out refinancing. This is important because a true cash-out refi has equity limitations which would ordinarily prevent/limit the availability of equity to be used as a buyout. A rate and term refinance can allow a borrower to use 95 percent of a home’s value compared to 80 percent for a cash-out. 

Measuring affordability:

Part of the impact of a divorce is the potential removal of household income. This can be in the form of an income-producing spouse leaving the house (per divorce decree) or the income producer staying in the house but having to pay spousal maintenance, child support and/or alimony. In either situation, whatever is identified in the divorce decree will be used for underwriting. If an applicant is required to pay out any money for support/maintenance, that amount will be counted as a monthly liability. If an applicant is set to receive money from support/maintenance, that amount will be counted as monthly income. However, there is a catch when it comes to an applicant receiving payments … the recipient must show that he/she has received at least six payments of the support/maintenance. 

It’s important to use a mortgage company with loan officers that are well trained and experienced with handling divorced loan applicants. Using the wrong company could be very costly for both sides. Going through this life event is stressful enough … the last thing you want is to put the real estate and mortgage situations in the hands of someone inexperienced.