In our previous post, we discussed how mortgage lenders assess net income for people going through divorce. To refresh, net income is not just the earned income a spouse has in take-home pay. Rather, it includes increases or deductions for receipt or payment of child support and spousal support, as well as payment of marital debts to a spouse. Because lenders require a minimum level of income to cover a mortgage payment, refinancing the home mortgage from the marriage could become an unsuspecting challenge.
Usually, the party who is awarded the house but has much less income would be the party most assume has difficulty refinancing. However, if the court awards that party sufficient amounts of child and spousal support, that party has a much larger net income stream and will become a better financial risk. So, if spouses would like this arrangement (the house going to the spouse with the lesser income), the decree will need to have enough support monies to meet the qualifications. But the impact on the other spouse’s income might need to be a consideration as well – overburdening that spouse makes the receipt of the support less definite and might also impair that spouse’s ability to get a mortgage for that spouse’s new home. Also, what about the equity due that spouse for ceding the home? If not balanced by other assets, such as a greater share of retirement funds, it will require a cash payout by the spouse seeking to refinance – and that payout will become an immediate drain on monthly income that could suddenly make refinance impossible.
As you can see, the parties to a divorce need to examine their financial viability for securing a mortgage at different income levels under different scenarios to see which makes the most sense. It is not just a matter of reaching a 50/50 division of assets – it requires at times some delicate financial projections and creative structuring of settlements.
Another wrinkle the puzzle adds: lenders need to see that a spouse receiving support will actually receive it to guarantee the risk. So, how much of a track record is necessary? Many lenders will say at least six months of payments. So, to assure a refinance parties might need to begin paying support prior to the entry of a final judgment (this often happens if the parties have a PDL judgment). Also, the support payments must extend for at least 36 months – without that duration the banks get skittish about consistent income and the risk of default.
So, how might parties work with these mortgage constraints to make sure that the party to receive the house can actually finance? First, make sure each party has enough income to secure a mortgage. If the party receiving the house does not have enough income, the parties need to look at support streams. If child support alone will meet the threshold, great. If not, some maintenance will be necessary, so long as it does not overburden the obligor spouse. And if the marital debt becomes problematic, having the higher earning spouse assume more debt in exchange for a greater share of the marital assets would allow the lesser earning spouse to keep the house.
As you can see, accounting for the ability to refinance can alter significantly the distribution of marital assets. It may not be a good investment to keep the house under these circumstances and a sale would be the better route. Short term versus long term thinking will come into play. On the other hand, failing to take account of the ability to refinance will result in one party walking away with more and one with less, with the less party usually the one with the house that may end up sold when it cannot be refinanced.
The lesson in these two posts is clear: work through all refinancing qualifications before agreeing to a property settlement involving the marital home.
If you have questions about refinancing the marital home and divorce, contact us – we can help.