Refinancing the Marital Home: Before, During or After Divorce

Divorce

At Hobson and Hobson we are committed to guiding our clients through the many questions and challenges that often accompany family law matters. We have resources and relationships with different service providers to assist during these transitional times in our clients’ lives.

We sat with our friend Bill Medley, Mortgage Banker with Quest Rock financial to ask him some common questions surrounding refinancing the marital home during or after a divorce. Click the links below each question if you would prefer to see the video clip of the interview.

Why would someone need to refinance during or after a divorce?
https://youtu.be/FfAfUS024t4?t=130

The most common reason we see people refinancing after a divorce is to pay a settlement that’s been reached in a divorce. Another common situation is if one spouse wants the house and the other spouse does not want the house, so the spouse who wants to keep the home will need to buy out the equity. Sometimes the couple together could afford the house with combined income, but separately perhaps that income would not be enough to get lending.

What can you do if the divorce has already finalized? If you’ve separated and you’re going to be staying in the home but your ex-house is still on your mortgage?

If the ex-spouse is still on the mortgage, we want to first see that we can qualify them to refinance the ex-spouse off the mortgage. The reason why we don’t just do what’s called a quitclaim deed and quitclaim them off title is it doesn’t take them off the mortgage. So if you’re the spouse not keeping home you don’t want that mortgage following you. It’s your debt regardless, even if someone else is paying. By refinancing, it removes the obligation permanently off your credit and therefore you’re not responsible for it. Just doing a quitclaim deed alone is not a solution. If you are the person who’s not going to be staying in the marital residence and your ex-spouse is remaining in the residence you definitely don’t want that mortgage still attached to your credit because if they miss a mortgage payment, even though you may be court-ordered to give them alimony or spousal support to make the payment, if they miss a mortgage payment that is going to affect your credit score.

Who is best suited for a divorce marital property buyout?
https://youtu.be/FfAfUS024t4?t=263

If one individual has an income that can qualify for the mortgage that would be the first thing you’d have to look at. If the other spouse cannot qualify and wouldn’t be able to do the refinance, it really boils down to who’s qualified to be able to afford the mortgage.

A situation we run across frequently in divorce scenarios is when the spouse who receives child support or alimony wants to claim it as income. They must receive it for at least a year to count it toward their income. If a person has only been receiving alimony or child support for two or three months it can not be counted toward income. There must be proof that they’re receiving the payments regularly and consistently. A lot of times there’s cash involved or different trade-offs and that can become complicated. One example is: dad pays for the ballet lessons and mom pays for baseball fees and the amount of cash exchanged is reduced by those other payments. This type of bartering makes it more complicated to make a transaction work. We’re looking for bank deposits or receipts, to document that the amount is coming consistently. If you’re hoping to have your alimony payments count towards your income, if you are trying to get financing for a refinance or even perhaps for a new property, you need to make sure that you’re not doing trade-offs. It’s important to have a paper trail so that it can be considered income. The same thing is true for child support.

Also, you need to have at least three years of continuance; if one child was 16 we wouldn’t be able to count the income for that child because typically child support is only received until that child is 18.

Debt to Income Ratio – what can you afford after divorce?
https://youtu.be/FfAfUS024t4?t=449

I typically don’t like people to try and calculate what they can afford on their own because there are different variables. There are times when you can borrow up to 50 percent of your gross income, but I never like to advise you to get it that close because then you’re running into problems paying for other debts and living expenses. Some people have other sorts of income we can’t count, like occasional commissions or bonuses. Maybe they have a part-time job. We like to be able to look and see exactly where the income is from so they can have a clear understanding of the amount they are qualified for.

What happens when a stay-at-home spouse has been awarded the marital property and the courts have ordered them to refinance? We have seen situations where a refinance has been approved just off the child support and/or alimony, but you have to have the 12 months of historical payments and it has to continue for three years after the time we close the transaction.

What is a Streamline Refinance? What are the benefits?
https://youtu.be/FfAfUS024t4?t=565

Generally, streamline refinancing reuses the original loan’s paperwork to allow quicker refinancing. There are a couple of different streamline loans. There’s an FHA one and one for veterans. When you’re removing someone from the loan who was on the loan originally, it becomes a credit qualifying loan, so you’re back to qualifying for the mortgage. The streamline loan can potentially be a little less expensive depending on the scenario. There are strict rules as to whether you can even use it. For example, if their current rate is 2.5%, they refinanced last year and they’re getting a divorce now. If the rates are now 3% you can’t do a streamline and go up in rate. The rules only allow for going down in rate, so they would have to do a full credit qualifying refinance. Typically with a streamline refinance there are no appraisals and no income qualifications, but then when you’re applying separately, if both people were on there for the original loan, we will need to qualify the solo borrower.

What are some tax implications when refinancing due to divorce?
https://youtu.be/FfAfUS024t4?t=655

My candid comment is they really need to talk to a CPA. There’s potential for capital gains and you know that’s a large number nowadays. I tell all my loan officers if they get asked the question tell them to consult with their CPA, and we have contacts we can refer them to if necessary.

Alimony and child support as debt when qualifying for refinancing.
https://www.youtube.com/watch?v=FfAfUS024t4&t=691s

We definitely run across this from time to time because alimony and child support is counted as part of your debt to income ratios. The amount of the child support or alimony can be a pretty large number, and depending on the gross income, it can affect the loan qualification. Once you get down to the last 10 payments remaining, it is easier to qualify for a higher loan.

Can a person have a co-signer when refinancing?
https://youtu.be/FfAfUS024t4?t=783

There are situations when a stay-at-home mom is awarded the marital property by the court, but she’s not able to qualify on her own because she simply doesn’t meet the debt-to-income ratio. She is able to get a co-signer like a parent or a sibling or a friend as a “non-occupying co-borrower”. On a conventional loan, there are limitations and she still would have to qualify to a certain level and then the co-signer could make up the difference. However, with a government loan like an FHA, the co-borrower could virtually qualify for the majority of the loan.

What if someone is awarded a lump sum amount of alimony as opposed to payments for a period of years? Do lenders look at that?

It depends on the age but with people younger than 59 and the money awarded is in a lump sum, we have them put it with a wealth manager and then create a monthly distribution. Then we do the math to show that it will continue on for at least 36 months. There are exceptions, but it is something that can be done. If the alimony is awarded monthly, then you’ve got to show that you have been receiving it for 1 year, and then you’ve got to have three more years continuing beyond that. It has to be specified in the court order that it’s going to be at least for four years for it to be able to count as qualifying income.

How has COVID-19 affected credit score qualifications for borrowers?
https://www.youtube.com/watch?v=FfAfUS024t4&t=925s

During COVID everybody tightened up on credit because of the risk of forbearances. People with lower credit scores or credit that was in rougher shape had a harder time getting loans because there was a higher likelihood of the loan going into forbearance. It’s starting to loosen up a little bit. If you have a lot of credit card debt it can make sense to a consolidation to ease cash flow.

If they are not able to get financing we can help you with different scenarios of paying down debt for six months or so. Those are ways, if they follow the plan, that can we can get them in a situation where we can help them out.

Talk to a lender at the beginning stages of your divorce
https://www.youtube.com/watch?v=FfAfUS024t4&t=1035s

As soon as a person knows that a divorce is on the table, they should go ahead and start talking to a lender because there may be things that are going to take several months to pay down. The lender can give them the direction ahead of time, and it would be great for the attorneys to know as they are working out potential settlement agreements. If there is credit card or other debt, even if the settlement agreement has an indemnification clause that says that they’re going to hold the other party responsible for this credit card debt, when they go to seek lending it still affects the credit score. The best thing is to get it off your credit. Have your ex-spouse go get another credit card and pay that one off so that’s in one person’s name and not both. The sooner you can talk to your lender the better. Making a good plan going forward is better and correcting mistakes.

Equity in the home – how much do you need in order to refinance?
https://www.youtube.com/watch?v=FfAfUS024t4&t=1265s

You can finance up to 95% of the value of the home, depending on the size of the mortgage. If you have a jumbo loan and you need to do refinance, it’s going to be more like 90% or less.

Equitable Division Payout: Refinancing to give your ex their fair share
https://www.youtube.com/watch?v=FfAfUS024t4&t=1353s

If the home is paid off but they do need to pay out the other person their equitable division of the equity, in the home you can cash out up to 80% of the value of the home. If you’re in a jumbo situation there are some other rules that come into play. If there’s a veteran involved, it can go up to 90%.

What is a Jumbo Loan?
https://www.youtube.com/watch?v=FfAfUS024t4&t=1413s

A jumbo loan is currently (April 2021) a loan amount in excess of $548,250. (Except for one county in Georgia – Oconee County- it’s a little higher).

If you would like to discuss the details of your situation, you can contact Bill Medley at (678) 222-2050 or www.QuestRock.com