House Refinance and Divorce – Part One

One of the most contentious issues in a divorce centers on the marital home – who will own it after the divorce or will it be sold? While we have covered some of the basics of whether a spouse should keep the home, in the next two posts we want to address some more complex aspects of refinancing and how that could factor into structuring a property settlement or support.

In general, most spouses jointly own the marital home, with both parties’ names on the deed and the mortgage. While transferring ownership upon divorce involves nothing more than executing a quit claim deed, a mortgage transfer does not really exist. A bank will not just remove one party from a mortgage. Instead, the spouse who is awarded the home must refinance the house in his or her own individual name.

While lawyers and the courts tend to think solely of how to divide marital property equitably, a mortgage company thinks only of the ability of the applicant to pay back the mortgage. And mortgage requirements can get rather tricky at times.

While a mortgage company will look at the total assets of an applicant as well as other liabilities, the main focus will be net monthly income – the bank wants to know that the applicant has a reliable income stream so that a loan becomes low risk.

Divorce involves some unique data for a lender – receipt and payment of support, either child support or spousal support (maintenance), in addition to debt repayments. A lender will consider child support and spousal support as income for the recipient and a debt for the obligor. So, for example, if a spouse has net income of $5,000 per month, and pays $1,200 in maintenance and $800 in child support, the lender will start with the spouse having only $3,000 of net monthly income. On the flip side, if a spouse has net income of $1,500 per month but receives $1,200 per month in maintenance and $800 in child support, the lender will put that spouse at $3,500 per month in net income. As you can see, this divorce put the higher wage earner at a lower net income, which means that spouse is actually a higher risk to the lender.

So, rule number 1 in divorce refinance: child and spousal support can hurt or help your bottom line income and your ability to qualify for a home loan.
How does this come into play in a practical sense? Generally, a lender would like the net income to equal at least three times the monthly mortgage payment. So, for a spouse with high equity in the house and a lower amount to finance, high income becomes less critical. But for a spouse with little equity in the house and a larger mortgage payment, high income is a necessity.

Spouses will not have the ability to rapidly change jobs and create more income in most situations; in general, the income earned at the time of the divorce will be the income used to calculate whether that spouse can afford a mortgage payment. The one exception may be a spouse who has not worked for some time and reenters the job market with an imputed income or specific expectations. So, if the income at the time of divorce remains rather fixed, the allocation of marital debt and support streams could make the difference between a refinance and a forced sale.

In the next post, we will discuss several strategies spouses can utilize in a divorce settlement to make sure refinance is possible.

If you have questions about refinancing the marital home and divorce, contact us – we can help.