Mortgage Monday

As the economy weakens and unemployment figures rise, other things start to happen to Americans. They file bankruptcy, lose their savings and get divorced. I am not being doom and gloom here, just pointing out the stats. Since I specialize in residential financing and write about it often, I will focus on the part on buying out your ex- and/or getting a mortgage after divorce. It is not as easy as it used to be.

I recently sat on a panel of lawyers doing a continuing education course in New York. My part was the practical stuff you needed to know about not screwing up your credit, getting your ex off the deed and finding the money to do so. Since, I am thinking as a lawyer here, as well as a mortgage loan officer, I have a lot to say. This is going to be a two-parter…

Last week we touched on buying out your ex and how to get some cash out of the equity to do this. Now i feel we should talk about how to qualify for a mortgage when buying a new house. Getting a mortgage is tough for anyone these days, but having additional debt adds more of a burden to the process.

Now for PART II

6. The lender will not use the same home appraisal used for the settlement.  Typically, the divorce settlement includes an asset analysis. The way to calculate the home value is simply to get an appraisal. Now, the one buying the home will want a lesser value than the one selling the home. Each party might want their own appraisal done. There will be a difference in value and a compromise will need to be made. Just know that if the buyout includes a mortgage, the lender will not use either appraisal and will get their own. All lenders require their own appraisal to be done for the mortgage- so you can use our appraisal, but we can’t use yours. The value the couple places on the marital home will not necessarily be the value the lender will use for the loan.

7. The lender will require the separation agreement to be final in order to qualify the borrower for a new mortgage. What needs to be done first and what type of documents must be shown to the lender?  This is necessary in order to verify division of assets and liabilities. It is also required in order to verify maintenance, alimony and child support expenses.  Most lenders will require a final separation agreement but not a divorce agreement. Some lenders will accept a letter from the attorneys outlining and verifying the division of assets, etc.

NOTE: if on the loan application, the applicant does not check the marital status as separated, then they are considered married and do not need to provide any documentation. However, all of the marital assets and liabilities will be considered jointly owned by the client/borrower and no maintenance, alimony or child support will be allowed. Either way, if you need to tell the bank do, if you done, don’t.

8. A separation agreement that states one spouse is not longer liable for the mortgage payments will not absolve the borrower from that liability for the new lender. If you are on the note and mortgage- you are on the note and mortgage. It might be acceptable for certain things (divorce), however when qualifying for a mortgage the lender will add it into the total liability section- I know there might be rare instances, but it is always best to get both parties off the existing mortgage when the settlement is being worked out. If it is done afterwards, somebody will get screwed. – I believe that when there is a divorce, it should be as clean as possible moving forward and it is up to the attorneys to make sure this is done regardless of how amicable the clients are (at the time).

9. Child support, alimony or maintenance payments may only be used as income if the applicant voluntarily offered this information. Under the Equal Credit Opportunity Act (ECOA)  a person may never be discriminated against (when applying for credit) based on sex, gender, race,  religion etc. in addition, the adequacy and consistency of income must be considered when qualify for a mortgage- BUT NOT ITS SOURCE. Thus a loan officer may not ask about the receipt of alimony and or child support unless the applicant offers the information first and it is needed to qualify for the mortgage.  A few things to know here: (1) In order to use alimony or child support as income – there must be signed agreement  (2) Alimony is considered income and will be on the tax returns- so this is how it will be calculated (3) Child support is not considered income and can be grossed up 125% on the loan applicationBoth should show a history of 3-6 months or even a year depending on the lender- most lenders again, want to see it will be receive for a period of at least 3 years moving forward

10. Alimony and child support are considered a debt. What needs to be shown to the lender and what if the borrower does not qualify for the mortgage with this monthly obligation?  This is why the party paying needs to show the separation agreement and tax returns. Every lender needs to calculate expenses and these monthly payments are calculated the same as a car payment. Please note you cannot hide child support payments from the lender if you write the kids off on your taxes. The lender typically gets a copy of the tax returns directly from the IRS and can verify all deductions claimed.

Ten is a nice number to end with. What should be the takeaway?  Get a lawyer, get your papers in order and know that there are no shortcuts. …..have a question? Send me an email at dale (at) dalesiegel.com  or simply post a comment.