With divorce and real estate there are many complex issues and potential problem areas. Today I want to focus on the critical area of refinancing a real estate property.
I’ve seen many cases where divorcing spouses have taken the advice of their attorney, or been mandated by a judge, to agree to refinance the marital residence with the ultimate goal being to remove “the out spouse” from liability on the mortgage note. While that makes sense because no one wants to owe on something they no longer own, this is one of those situations in life where it’s many times easier said than done.
Problems can occur when there has been no pre-qualifying done to see if the spouse keeping the property, the “house spouse,” can qualify for a refinance now or in the future. Unfortunately, this is a common occurrence that can lead to lots more headaches down the road.
Read on as Craig Berry, Mortgage Banker with Access National Mortgage in Atlanta, (and one of our experts at the next Speed Divorcing Event – June 19, 2012) shares some further insights from his blog here.
Although refinancing the home under the name of one spouse may be a great option, what happens when the spouse can’t qualify for the loan with just one income? Another concern may arise when one spouse is required to pull cash out from the equity and pay off the other spouse. In this circumstance, the concern may not be affordability as much as its equity… or lack thereof. There are fundamental details that divorcing couples must know about refinancing prior to finalizing the divorce terms.
For example, spouses who need alimony and child support over time to qualify for a mortgage will need to take into account a few timing issues for refinancing. While some loans allow alimony and/or child support income to qualify for a mortgage refinance, they only allow this income if it can be documented that the income has been received for a specified, minimum period of time. They will also need to document that continued payments will be received for specified periods of time. These minimum time periods can vary according to the loan program.
When refinancing to cash out and pay off a spouse to satisfy terms of the divorce, the borrower may want to look at an FHA loan. Not only does FHA allow for less equity on cash out refinance loans, FHA loans may also offer less stringent underwriting guidelines for spouses that do not qualify for a Conventional loan.
Another consideration when refinancing in a divorce situation is how long the spouse staying in the home expects to keep the property. Divorcing parents may want to keep their children in their family home until they reach 18 and/or head off for college. In situations such as these, a 30-year mortgage may not be the best loan. Adjustable Rate Mortgages (ARMs) seem to often get a bad rap. However, five years of a lower rate and payment may be exactly what’s needed to keep the mortgage affordable. Not to mention, these lower house payments for a specific period of time may be necessary for situations where alimony and child support aren’t enough to qualify for the payments on a fully amortizing fixed rate mortgage.
Refinancing the current mortgage loan and removing a spouse may be the most practical alternative. However, given the current real estate market and stringent underwriting guidelines, several factors need to be well thought-out.
In addition to the points mentioned above consider the following:
- Is there equity in the home currently or is it underwater (negative equity)?
- Does the spouse that’s refinancing have sufficient credit to qualify for the loan on their own?
- Does the spouse that’s refinancing need the alimony and/or child support from the divorce settlement to qualify for the loan?
As you can see, divorce and real estate matters have many complexities, especially in today’s turbulent market. I encourage you to understand what issues and questions apply to your divorce and get answers early on so you can be smart from the start.