We wanted to find out how different lenders treat divorce situations, discover if child support can be counted as qualifying income and get tips for divorcing sellers.
Question: Do all lenders treat a divorce situation the same?
Answer: No! Many lenders have overlays on Fannie/Freddie guidelines when it comes to divorce, especially banks. Mortgage companies don’t tend to have these overlays. An example of an overlay is Fannie may allow a divorcing client to purchase a house before the divorce is final, but banks overlay that and require the divorce to be finalized. In general, banks are not good places to get a loan during a divorce.
Question: How is the equity in our home handled if we are both entitled to a share of it?
Answer: If home equity needs to be borrowed to pay off some or all of the marital obligation, there are two ways to do it. First, you can refinance your first mortgage and take cash out so you have a new, larger first mortgage. The other option is to obtain a second mortgage for the amount you need. There are many factors that go into which of these two options is the best for your situation so you will want to work with a trusted mortgage professional.
Question: Is it possible to purchase a home before a divorce is final?
Answer: Yes, but there are a few caveats. The main items are:
1. If your name is on the mortgage, you’ll need to have enough income to qualify for both homes because you won’t have a divorce decree indemnifying you from the payment on that home.
2. You’ll need to have enough funds for a down payment (minimum is typically 3%-5% down) as you likely won’t have received your portion of the home’s equity from the settlement (typically received after the divorce).
3. You’ll need to work with a non-bank lender as banks won’t close on a mortgage prior to the divorce being finalized.
Question: Can I count my child support toward my income when qualifying for a loan?
Answer: Yes, but only if it meets certain parameters, which are actually the same parameters used if you’re utilizing spousal maintenance as qualifying income. Child support or spousal maintenance payments have to be received for six months and they have to be expected to continue for three years from the closing date for the mortgage.
Question: What are some caveats that would be useful for divorcing sellers to know?
Answer: If you find out that a buyer is in, or recently went through, a divorce, make sure the lender for that buyer understands divorce transactions. Unfortunately, most don’t.
Question: How does being recently divorced impact buying a home?
Answer: If a buyer was recently divorced but their name is still on the old loan, they should be able to qualify for a new home without using that debt against them (assuming the divorce decree indemnified them from the old mortgage payment). This means they don’t have to wait to purchase.
Question: Who gets the house if we divorce?
Answer: Each state has different rules regarding what marital property is divided during a divorce and how the property is split amongst the divorcing couple. The biggest factor determining how a separating couple's home will be split is whether their state follows the community property approach or equitable distribution rules.
State Divorce Laws. Divorce laws vary in each state and these laws differ on how marital property is split between the divorcing couple. These rules will only apply to marital property and will not be applied to property that was acquired before marriage or inherited during marriage. Those remain separate in most states. Property division will depend on several factors, including:
Where you live
When the property was purchased
How long you have been married
How the property was titled.
States follow one of the following two approaches when dividing up property during a divorce.
The Community Property Approach. If you live in a state that follows community property rules, you and your ex will split most divorce assets in half. This likely means that you and your ex-spouse will get 50% of the value of your home or home value if you bought it during your marriage. The nine states that follow community property rules are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
The Equitable Distribution Approach. Every other state follows this approach which allows a judge will divide the property as they deem fair. This means the court will decide, on a case-by-case basis, the kind of division that would be fair for everyone involved.
Do you have questions about a divorce situation that we didn't answer here? Contact us and we will either answer your question or connect you with someone that can. info@agroupmn.com
