Your Mortgage: How divorce relates to loan qualifying

Mike Miles

By Mike Miles
Divorce is a major event. Lives are about to be turned upside down and inside out. Parenting, childcare, liabilities and assets, including housing, are all about to divided in some fashion. Today’s brief post isn’t enough time or space to dive all the way in about how divorce affects housing, but it can serve a discussion of some basics.

In most divorce situations, there is a property owned that is about to either be sold or retained by one of the parties. One of the most frequent questions we get is how the exiting spouse can buy a new house and/or how to buy out an existing spouse.

Ideally, the divorce proceedings would be quick and decisive with a final divorce decree being filed with the county. This decree is the legal document that identifies things like asset/liability separation, alimony, child support and the disposition of any real estate owned. However, in many cases, one of the parties is looking to buy a new house prior to divorce being finalized. Below is a brief discussion of when a divorce decree is finalized. Next week’s post will discuss what happens with a divorce isn’t finalized.

Divorce decree finalized and filed:

Often, the party identified as the one maintaining ownership of a primary residence will need to buy out the exiting party. Depending on litigation (we will avoid this variable today), equity is typically split 50/50.

The question is how the available equity gets accessed. In other words, where does the spouse who is staying in the home find the money to pay the spouse who is leaving? It’s done with some type of refinance loan; whether that’s a refinance of the existing mortgage plus the split equity or with a home equity line of credit. Doing a full refinance is the loan option used the most in these situations. Any division of equity is not considered “cashing out,” which helps eliminate added loan guideline limitations. Additionally, a full refinance will remove the spouse from the liability (as probably mandated with the divorce decree).

The party maintaining the house must qualify for the new mortgage payment on their own or with someone other than the ex-spouse. If income (child support, maintenance, alimony) is to be paid to the person staying in the home, it’s possible we will have to wait up to six months to do the refinance. Guidelines often state that alimony (maintenance) and child support income needs to be received by the borrower for six consecutive months. This is required to prove that income will be stable. If the person staying in the house is required to pay alimony or child support, this is treated as a monthly liability and and is counted against debt-to-income ratios just like a car payment or credit card payment.

The party exiting the property also needs to qualify on their own (same as above) if they wish to buy a new house. The same rules apply relating to any income/expense associated with the divorce. If this party finds a house to purchase before the other party refinances the primary residence, the house payment related to the primary residence not held against the existing party in buying a new house (as long as the divorce decree is filed and states that they no longer have ownership to that property).

No two divorce situations are the same so it’s difficult to identify potential results from all the variables that could exist. The main point today is to identify some basics. We work with divorces and the mortgage loans that surround them frequently, and we encourage anyone in this situation to call us for a no-cost consultation.