Your Mortgage: Divorce and loan qualifying … part 2

Mike Miles

By Mike Miles
Last week’s post introduced some basics concerning what to be aware of when borrowers are coming out of a divorce after it’s been finalized. This week’s post will discuss some basics for when a divorce hasn’t been finalized. I’ll say it again; no two divorces are the same. Keep that in mind when reading this.

Many situations involving divorce include the two spouses no longer cohabitating during legal separation and/or divorce proceedings. While the two parties may be amicable with each other, they most likely no longer want to live together. It isn’t uncommon for the parties to have an idea of which one, if any, will maintain ownership of their primary residence. The big question for any spouse moving out of the house is … when and how can they buy a new house?

Divorce decree not finalized:

This one can get a little tricky because one of the questions on the loan application for borrowers to answer deals with if anyone has been/is divorced. Application answers are supposed to be representations of the truth. If a divorce has been legally filed, this question should be answered accordingly so that underwriting can ask for the correct documentation. Depending on what’s been filed/discussed, this documentation could line out who is going to be responsible for the primary real estate and who will receive spousal/child support (even if the amounts aren’t yet determined).

If nothing has been filed … the home-buying process can take some twists and turns. In both Kansas and Missouri, any borrower that’s legally married isn’t required to have the spouse listed on either the loan application or title vesting. Sounds odd I know. Technically a buyer (spouse) could buy a new home on their own and not list the other spouse. The one on the loan needs to qualify on their own (income, credit and down payment), and keep in mind that this does NOT avoid any property interest rights from a legal perspective. People legally married in Kansas and Missouri by default have equal rights to interests in real estate.

If a spouse goes this route, one of the sticking points would be if the new house is bigger or smaller (size and price) than their current primary residence. If it’s smaller (in most cases it is), underwriting may force the property to be purchased as an investment property rather than a primary. Investment properties require larger down payments and have higher interest rates.

What if a spouse doesn’t have the assets to put enough money down on a property underwritten as an investment property? They can do one of two things:

  • Get a gift from family for the down payment and/or have a non-occupying co-borrower added.
  • If amicable and agreeable, they can have their other spouse sign with them on the loan application and then that spouse would deed themselves off the property once the divorce is filed and finalized.

If a divorce situation isn’t amicable but instead more hostile, we would advise any spouse to wait to purchase any real estate until proceedings are finalized. This would avoid any sticking points related to litigating ownership interests in any property owned.

Divorce is unfortunate for sure. However, it’s a part of people’s lives and it can be complicated as it relates to buying/selling/owning real estate. As I mentioned last week, we have years of experience with almost any situation imaginable, and we would be happy to help guide you through the mortgage process.