Mortgage guidelines for divorcing couples
Not only are you forced to endure the emotional pain and suffering through separation and marriage dissolution, but the finances need to be dealt with as well. Divorce and mortgage go together like fire and tungsten (the metal with the highest melting point, used for incandescent light bulbs, but is malleable and can be cut). Navigating the guidelines, while either preserving your current home or acquiring a new one, are not for a novice lender or online mortgage call center. You need a specialist, one who knows the applicable guidelines and can help break them down, shed light and help you work through them to finally cut the tie (see what we did there?).
Married, Unmarried or Separated
First, it is important to know the milestones and how they apply. When you are applying for a mortgage, your marriage status has to fit into one of three choices: married, unmarried or separated. The separated status indicates that you have a legal separation filed. This status requires that you have served and filed a petition in the District Court in the county where you or your spouse lives. From www.MNcourts.gov:
QUESTION: Since it costs as much, takes as long, and involves the same major issues, why would anyone want a legal separation?
ANSWER: Some couples choose legal separation because of religious beliefs or moral values against divorce. In a few cases, there may be insurance or other financial reasons for a legal separation.
A legal separation includes details about alimony/child support, custody, who is ordered to pay what (mortgage or other debt), separation of assets and liabilities, and just about anything else you can imagine to put in there (who gets the dog, business interests, other real estate, etc). Because of the cost and process, it is rare to have a legal separation filed and more likely that a divorce filing is entered instead. We should note right now that we are not attorneys and are not licensed to, nor want to give legal advice. Consult with a reputable family law attorney on what the best approach is for your scenario. A great resource to help you decide what is the best course of action:
SUZANNE M. REMINGTON
Attorney at Hellmuth and Johnson
As for married or unmarried it depends upon what is recognized by the state. If your marriage was cultural and not legal, your application status is “unmarried” regardless. If you were legally married, your application status remains “married” until the divorce decree is finalized in court. Once the decree is finalized, the specific details contained within it have ramifications for access to mortgage credit.
The single best piece of advice we can give you is to have us review your draft divorce decree BEFORE it is finalized
What we see most often is a completed and filed decree that has requirements in it that cannot be met. Some examples include a requirement for one party to complete a refinance of an existing mortgage, yet they don’t qualify to do so, or to sell a property within a short period of time and having no where else to live, or to secure housing for dependents and an inability to acquire it. The specifics regarding finances take careful planning. Before we forget to mention it – take care of your credit profile as well. We see all kinds of train wrecks – from excessive spending to “punishment non-payments”, meaning one party stops paying the bills to punish the other. Try to not do these things as joint credit will stay on your credit report even after the divorce is complete.
A mortgage is a lien on real property, secured by a promissory note. That promissory note contains a “promise to repay” and whoever signs it is a borrower. Divorce does not release liability on that note, but a court order (divorce decree) can assign the responsibility to one party. The court order does not remove the liability from credit bureaus or credit reporting, so if it doesn’t get paid the late payments will negatively affect any borrower(s)’ credit. So, what if a court order assigns the responsibility to the other party – how does a divorce work to buy another home? Getting a mortgage during divorce adds a few things to navigate, but we can help you find your way.
A court order (divorce decree) that the other party pays the mortgage means it is no longer counted in your debt ratio for qualifying on a new mortgage. Essentially, when underwriting your loan application we disregard the mortgage payment if the final decree orders the other party to pay it. However, your qualifying credit score will reflect the payment history on that mortgage note. Most loan programs utilize an automated underwriting system that will read mortgage histories from the credit report and make an automated decision about your approval. A mortgage payment that is two months past due in the last year will almost certainly negatively affect the approval of a new application.
Best course of action? Get a draft of your decree to us before it is finalized and we can review it in combination with your application and do a “hypothetical” preapproval. That will be contingent on the finalization of that decree.
Title To the Property
If we were you, we would not quit claim deed off title until the mortgage is satisfied or the decree is filed and it was required in the decree. The court order could also specify who gets what equity, timetable on sale of the property, etc. In Minnesota, as long as a property owner is married and it is principal residence, both spouses need to sign to convey (sell, transfer title) property. Once the decree is completed and one party has signed a quit claim deed, the property can be conveyed by one party. So, if you want to maintain control over transferring the title to the property, don’t quit claim away your interest until after the judgment and decree is entered or an attorney advises you differently. Sometimes a quit claim deed with a lien interest is appropriate. Again, discuss with your attorney prior to filing a deed to real property. Also to note, signing a quit claim deed prior to the decree being completed doesn’t remove a spouse’s interest in a homesteaded property. MN Statute 507.02
Refinancing a Mortgage In Divorce
If you are the party retaining the property and will take on sole ownership and responsibility, the decree will likely require you to refinance the loan. Many challenges are presented by this requirement. One is the interest rate on the existing loan may be much lower than the current market rate. The only way to keep this interest rate is if the loan is assumable (if the loan can be assumed by you from the both of you, typically only FHA, VA and USDA loans) or to keep the loan in place. Another challenge is you likely qualified jointly for the existing mortgage if both parties are on the note and now you will need to qualify solely. A third challenge is all of your joint debts will now be counted in your debt ratio being analyzed for the new loan. In addition, the payment history of all those debts will also be factored in.
Getting a mortgage during divorce adds an extra complexity, but we are here to help and have extensive knowledge to guide you. We recommend that you resolve as much of the other debt prior to taking on the refinance application, if needed, to help you qualify or qualify for better terms. We will do an initial review for you and advise of what action is needed. You can get started with the refinance request here and indicate “remove coborrower” in the request:
Our final word: don’t wait until your divorce is finalized to seek information on refinances and mortgages. Doing so early can make all of this easier, less costly, and maybe even save you time in court.