Today, we discuss eight common marital home and refinance pitfalls that can occur while trying to settle your divorce case.
1. Being off the deed doesn’t relieve financial responsibility.
Without proper guidance, one spouse may agree to sign a quitclaim deed to transfer the deed to the other spouse according to their settlement, without realizing they would keep financial responsibility without ownership interest. Unfortunately, most lenders will not allow one spouse to simply assume the existing mortgage. If both spouses are on the mortgage, refinancing will probably be required to take one spouse off the mortgage. No matter what the settlement agreement or divorce judgment says, if a spouse’s name is on a mortgage, the lender will hold him or her responsible for the mortgage payments. The mortgage will also continue to show up on both spouses’ credit reports as an obligation which often keeps the spouse who wants a new house of his or her own from getting a mortgage, or for that matter, any loan they may need for other purposes.
2. Not confirming whether you can qualify to refinance the mortgage.
If you’re keeping the house, your spouse will likely require you to refinance to remove his or her name from the current joint mortgage. You need to know whether you qualify to refinance before agreeing to be awarded the house. You should work with a knowledgeable mortgage lender who has experience working with individuals going through a divorce early in the divorce process to determine if you can qualify. Keep in mind that refinancing may not be possible. We know that money problems are a cause for many divorces. It’s not uncommon for refinancing to not be possible. While two incomes may have been enough to qualify for a mortgage to buy the marital home, one income may not be enough for one spouse to qualify for refinancing. It’s common for the wife/mom to want to keep the home, but her income, even with support, may not be enough. Also, refinancing comes with a cost. Refinancing fees can be 2% – 4%, interest rates have increased over the past few years and your credit score may not be good or may have gone down during the marriage which in most cases, will make the overall cost of the mortgage higher.
3. Not considering maintenance on the house.
Is your house due for a new roof? Did you and your spouse put off making necessary repairs over the past few years? If so, you need to factor these future expenses into the cost of keeping the house.
4. Not properly evaluating the rent vs. own decision.
Clients often state that their monthly mortgage payment is less than it would cost to rent and use this statement as their justification to keep the house. The problem is you’re comparing apples and oranges. Does your monthly mortgage payment include an escrow payment for property taxes and homeowner’s insurance? How much do you spend each year on maintenance for the house and the land? Those costs can add up. Do you need an additional cash flow? If so, did you consider the potential investment income you could earn if you invested your share of the house equity that could be received? It’s not a bad decision to keep the house; however, you need to be sure you’re doing an apples-to-apples comparison.
5. Not confirming that there are no liens on the property.
You need to have someone run a title search to make sure there are no liens on the property before making a decision. Obtain a title report and walk through it with your mortgage lender, real estate agent, or lawyer.
6. Not understanding that spousal support and child support require a minimum of a 6-month history of receipt to be considered as ‘qualified income’ for mortgage purposes.
One of the key criteria that lenders look at when determining if you’re a qualified borrower is your debt-to-income ratio. The lower the better. Spousal maintenance and child support can be used as income to help you qualify for a mortgage. However, lenders want to know that this is a reliable source of income that will continue. As a result, their underwriter will require a 6-month history of receiving support for the support to be considered as qualified income. It may take time for support to be counted as income for purposes of qualification. When you are depending on spousal support, child support, or other payments made under the separation agreement to qualify for a loan, you may be surprised that a certain number of payments must be made both in the past and into the future to qualify for a loan. The number of payments required will depend on whether a conventional loan or an FHA loan will be used. With a conventional loan, money paid to you as spousal support or child support may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to you for at least the most recent six months and is obligated to make payments to you for the next three years. Documentation is required.
7. Not considering a cash-out refinance as a source of funds to buy out your spouse, consolidate other debt, or pay attorney’s fees.
A cash-out refinance is when you take out a new loan with a higher balance than your existing loan. The funds from your new loan are used to pay off the existing mortgage balance, pay any closing costs, and get any additional funds. You’re basically pulling cash out of the equity in your home and can use that source of funds to buy out your spouse, consolidate high-interest credit card debt, or pay your attorney’s fees.
8. Thinking that coming off the title to the house is the same as coming off the mortgage.
The warranty deed to the house and the mortgage note are not the same. You can be removed from the warranty deed to the house by signing a quitclaim deed. For you to be removed from the mortgage note, the note has to be paid in full or your spouse has to assume the mortgage note or your spouse has to refinance the mortgage note into his or her sole name.
Should you need the assistance of an experienced divorce attorney in Creve Coeur and O’Fallon or have questions about your divorce or child custody situation, know that we are here to help and ready to discuss those questions with you.