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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 SeparatedGavel

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
hjlawfirm.com

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.

The Mortgage

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

decree

Ending a marriage has challenges related to property and mortgage

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:

Refinancing Made Easy

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.

Home builders have had a tough go the last 5 years. Part of the issue now is finding the labor source to do the construction. Many small home builders tell us that their laborers are all in North Dakota working on the oil pipeline. The other difficulty is in available land for development. You would think that we have plenty of places to build new houses, but consider the infrastructure needed for a new housing development in the suburbs. It takes time and resources to create a space for a home to be built, and up until 18 months ago we had very little demand for new homes.

Most of the new construction you might be seeing around the Minneapolis/St. Paul urban areas is well in excess of $300,000 as available land is scarce inside the 494/694 loop, and the costs of removing the previous structure drive the final price up. Demand in this market is also strong, which pushes prices up as well.

If you are looking for an affordable new construction home, are you willing to expand your geographic area beyond the metro? Many new construction homes closer to $200,000 are available if geographic areas further from downtown Minneapolis/St. Paul are an option.

During the weekend of November 16, 2013, Fannie Mae will implement Desktop Underwriter® (DU®) Version 9.1, which will include the key changes described below:

  • The maximum debt to income ratio (DTI) for most programs will be 45%. The maximum loan to value will be reduced to 95% (or 5% down required for conventional financing going forward). Those clients who had a deed-in-lieu or pre-foreclosure sale that haven’t been approvable in the past may now be eligible for new conventional financing.
  • The Furlong Team will accept new clients and purchase agreements under the 3% down program until November 15th.
  • The Maximum Allowable Debt-to-Income Ratio and Minimum Credit Score Requirements sections below have been combined. DU will not apply additional requirements of a maximum debt-to-income ratio (DTI) of 45%.
  • The LTV/CLTV/HCLTV Ratio Cap Lowered to 95% section below has been updated to include information on the timeframes in which mortgage loans exceeding the maximum LTV/CLTV/HCLTV ratio of 95%.
  • DU will continue to allow CLTV ratios of 105% when the subordinate financing is a Community Seconds® mortgage.
  • Identifying a Deed-in-Lieu of Foreclosure or Pre-foreclosure Sale can now be done manually, where DU was unable to read the credit report accurately before. This may help these clients gain approval.

Read the complete Fannie Mae DU release notes here.

Upcoming Changes to the Qualified Mortgage Rule

The primary impact home buyers and home owners will see from the Qualified Mortgage (QM) rule is the ability to repay provision. Here in Minnesota, we have been ahead of the national curve due to changes made to state law in 2007 and 2008. Mortgage originators have been required to document a borrower’s ability to repay a mortgage by comparing their income documentation and outstanding liabilities from the credit report and total housing expenses. However, the specific definition of “ability to repay” wasn’t provided, other than to say “reasonable.” The standards will become more strict.

Read the state law here.

Ability to Pay and DTI

The new ability to repay federal law comes with a definition stating that a borrower does not have the ability to repay a loan if their total debt to income ratio (DTI) exceeds 43%. Today, we can get loans approved with a much higher DTI, which for some borrowers does make sense and they do have a “reasonable” ability to repay the mortgage.

However, the primary impact of the new rule will limit everyone to the same DTI regardless of “reasonable” or not. Critics of “reasonable” will state that no one should have a DTI over 43% as that is too high, but they fail to consider a wide array of circumstances where the DTI is not a valid test of ability to repay.

Here are a few examples: self-employed persons, commissioned employees with less than a 2-year history of commission, non-borrowing spouses, roommates that pay rent, part-time employees, and other situations where a “compensating factor” applies but the total income picture cannot be used to qualify the borrower. When reviewing these scenarios under the “reasonable” microscope, it sometimes makes sense to approve a loan with a higher DTI, knowing that they strong ability to repay regardless of the ratio.

The current Consumer Finance Protection Bureau (CFPB as created by Dodd-Frank 2010) rule allows for a “temporary” exception to the 43% DTI rule when the loan is eligible for sale or guaranteed by either Fannie Mae or Freddie Mac. It doesn’t say how long this temporary exception applies, and most FNMA/FHLMC approvals are currently limited to 45% anyway (except HARP refinances and other applications with very strong qualifying criteria).

Read the complete QM Rule here.

Mortgage loan officers will adhere to the Qualified Mortgage rule as it gives us “safe harbor” from future liability if the loan fails to perform (or the borrower defaults, depending on how you look at it). No loan officer will want to be sued because their client could not or did not pay their mortgage payment.

As a mostly-inclusive, online real estate search engine, Zillow offers users more information than most real estate web searches. Not only does it incorporate the active listings on the MLS, but also simultaneously shows pre-inventory data.

This pre-inventory is information on mortgages that are in default, or have been to foreclosure auction, and may be becoming available for sale soon. It also has a function for homeowners to list their home for sale without enlisting the services of a Realtor and gaining an audience by doing so.

Users can request information on a home directly from the listing agent in many cases and see a good amount of information on that home, the neighborhood, the other recent sales nearby, the schools, parks, amenities, transportation and property taxes.

One lesson I learned in my elementary education was to always consider the source when reviewing information. It is important to know where the information is coming from, who puts it there, and if it is accurate.

Over the years I have noticed accuracy issues with some of the data, the Zillow Zestimate tool, and foreclosure actions specifically. The last few months I have been searching for another investment property opportunity in my neighborhood, and in comparing Zillow foreclosure data with Hennepin County Sheriff’s Department data I have noticed discrepancies.

My advice – start a search with Zillow to get information, but rely on a licensed Realtor when buying or selling a home. I’m excited to see this tool grow, and the monitoring they have in place on their real estate forums is great, and the service they provide in connecting home buyers with professionals is unparalleled in our industry.

Go to Zillow’s Bloomington Page

See our reviews on Zillow here

Steve Furlong on Zillow

This message was released by the U.S. Department of Housing and Urban Development covering the newest update to FHA loans.

Mortgagee Letter 2013-26

Date: August 15, 2013

To: All FHA-Approved Mortgagees

Subject: Back to Work – Extenuating Circumstances

Purpose: The purpose of this Mortgagee Letter (ML) is to:

  • Provide minimum underwriting standards and criteria for evaluating
    borrowers who have experienced an Economic Event, as defined in
    this ML, that resulted in a severe reduction in income due to a job loss
    or other circumstances resulting in reduced Household Income;
  • Describe the use of housing counseling to qualify under the provisions
    of this ML
  • Amend HUD Handbook 4155.1, Chapter 4, Section C to add an
    Economic Event to the list of examples of extenuating circumstances
    and instruct lenders to use the guidance for Back to Work –
    Extenuating Circumstances established in this ML as Chapter 6
    Section G, to underwrite an applicant with an Economic Event; and,
  • Revise HUD Handbook 4155.1, 4.A.7.e, to clarify the process for
    requesting a review of information contained in CAIVRS for
    borrowers seeking an FHA-insured mortgage in accordance with the
    provisions of this ML.

Introduction:
FHA is continuing its commitment to fully evaluate borrowers who have experienced periods of financial difficulty due to extenuating circumstances.
As a result of the recent recession many borrowers who experienced unemployment or other severe reductions in income, were unable to make their monthly mortgage payments, and ultimately lost their homes to a pre-foreclosure sale, deed-in-lieu, or foreclosure. Some borrowers were forced to file for bankruptcy to discharge or restructure their debts. Because of these recent recession-related periods of financial difficulty, borrowers’ credit has been negatively affected. FHA recognizes the hardships faced by these borrowers, and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.

To that end, FHA is allowing for the consideration of borrowers who have experienced an Economic Event and can document that:

  • Certain credit impairments were the result of a Loss of Employment or a significant loss of Household Income beyond the borrower’s control;
  • The borrower has demonstrated full recovery from the event; and,
  • The borrower has completed housing counseling.

Housing counseling is an important resource for both first-time home buyers and repeat home owners. Housing counseling enables borrowers to better understand their loan options and obligations, and assists borrowers in the creation and assessment of their household budget, accessing reliable information and resources, avoiding scams, and being better prepared for future financial shocks, among other benefits to the borrower.

Effective Date:
The guidance in this ML is effective for case numbers assigned on or after August 15, 2013 through September 30, 2016.

FHA now allows financing approval with bankruptcy or foreclosure at least 12 months old.

The lender must verify and document that:

  • A minimum of twelve (12) months have elapsed since the date of foreclosure or deed-in-lieu
  • The foreclosure or deed-in-lieu was the result of the Economic Event.

 

President Obama discusses the future of Fannie Mae and Freddie Mac. Steve Furlong had his question directly answered by the President!

See the full webcast here:
http://www.whitehouse.gov/photos-and-video/video/2013/08/07/president-obama-answers-your-housing-questions-zillow

The question was: “President Obama: If Congress is successful in scaling Fannie Mae and Freddie Mac down, what model fills the gap?”

His answer was that less government involvement in the mortgage securitization process is needed. He is searching for effective ways to spur private investment in mortgage securities, but to gradually make any changes so as not to harm the delicate recovery of the housing market.

Our take on this is one of optimism for improved financing options and flexibility as the current market is restrictive for many clients in being able to obtain financing. We are up for any challenge in helping to guide families home and work with every client until the end result is achieved – home ownership!

Welcome to our Real Estate Glossary. We hope that these definitions will help you to better understand the home buying and selling process.

Adjustable-rate mortgage (ARM): a mortgage in which the interest rate is adjusted periodically based on a pre-selected index. Also sometimes known as a variable-rate mortgage.

Amortization: loan payment by equal installments of principal and interest, calculated to pay off the debt at the end of a fixed period.

Annual percentage rate (APR): the interest rate reflecting the cost of a mortgage as a yearly rate. It allows homebuyers to compare different types of mortgages based on the annual cost for each loan.

Appraisal: a document giving an estimate of a property’s fair market value; generally required by a lender before loan approval.

Assessment: a local tax levied against a property for a specific purpose, such as a sewer or street lights.

Balloon (payment) mortgage: usually a short-term fixed-rate loan which involves small payments for a certain period of time; after that time period elapses, the balance is due or is refinanced by the borrower.

Cap: a consumer safeguard on an adjustable-rate mortgage that limits how much a monthly payment or interest rate can increase or decrease.

Certificate of eligibility: document given to qualified veterans entitling them to Veteran’s Administration guaranteed loans. Obtained by sending DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility).

Certificate of reasonable value (CRV): appraisal issued by the Veteran Administration showing a property’s current market value.

Closing: the meeting between the buyer, seller, and lender or their agents where the property and funds legally change hands.

Commitment: agreement, often in writing, between a lender and a borrower to loan money at a future date subject to the completion of paper work or compliance with stated conditions.

Construction loan: short term interim loan to pay for the construction of buildings or homes. Usually written to provide periodic disbursements to the builder as progress is made.

Contract sale or deed: contract between buyer and seller of real estate to convey title after certain conditions have been met.

Conventional loan: a private sector loan, one that is not guaranteed or insured by the U.S. government.

Credit report: documents an individual’s credit history, listing all past and present debts and the timeliness of their repayment.

Debt-to-income ratio: the ratio, expressed as a percentage, which results when a borrower’s monthly payment obligation on long-term debt is divided by their gross monthly income.

Deed of trust: in many states, a document used instead of a mortgage to secure the payment of a note.

Default: failure to make the monthly payments on a mortgage.

Delinquency: failure to make payments on time. This can lead to foreclosure.

Down payment: the portion of a home’s purchase price paid in cash and not part of the mortgage loan.

Earnest money: money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment.

Equal Credit Opportunity Act (ECOA): a federal law requiring lenders to make credit equally available without discrimination by race, color, religion, national origin, age, sex, marital status, or income from public assistance programs.

Equity: an owner’s financial interest in a property; calculated by subtracting the amount still owed on the mortgage from the fair market value of the property.

Escrow: an account held by the lender into which the homebuyer pays money for tax or insurance payments.

FHA: the Federal Housing Administration provides mortgage insurance to lenders to cover most losses when a borrower defaults; this encourages lenders to make loans to borrowers who might not qualify for conventional mortgages.

FHA loan: loan insured by the FHA open to all qualified home purchasers. While there are limits, they are generous enough to handle moderately priced homes almost anywhere in the country.

FHA mortgage insurance: a policy paid at closing to insure the loan with FHA.

Fixed-rate mortgage: mortgage with payments that remain the same throughout the life of the loan because the interest rate and other terms are fixed.

Foreclosure: a legal process in which mortgaged property is sold to pay the loan of the defaulting borrower.

Hazard insurance: form of insurance in which the insurance company protects the insured from specified losses, such as fire or windstorm.

Lien: a legal claim against property that must be resolved before the property is sold.

Loan-to-value (LTV) ratio: a percentage calculated by dividing the amount borrowed by the sales price or appraised value of the home to be purchased.

Lock-in: guarantees a specific interest rate if the loan is closed within a specific time.

Market value: the highest price that a buyer would pay and the lowest price a seller would accept on a property.

Mortgage insurance: a policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; usually required with a down payment of less than 20%.

Mortgage modification: an option that allows a borrower to refinance and/or extend the term of the mortgage loan thus reduce the monthly payments.

Origination fee: fee charged by a lender to prepare loan documents, make credit checks, inspect and sometimes appraise a property; usually a percentage of the loan’s amount.

Points: prepaid interest charged at closing by the lender. Each point equals 1 percent of the loan (e.g., 2 points on a $100,000 mortgage would be $2,000).

Prepayment: permits the borrower to make payments in advance of their due date, thus saving money on interest.

Prepayment penalty: charges for the early repayment of debt.

Principal: the borrowed amount, less interest or additional fees.

Private mortgage insurance (PMI): insurance paid by the borrower. This may be required by the lender when the down payment is less than 20%.

Realtor: a real estate agent or broker affiliated with the National Association of Realtors and its local and state associations.

Recording fees: money paid to the lender for recording a home sale with the local authorities, thereby making it part of public records.

Refinancing: paying off one loan by obtaining another; refinancing is generally done to secure better loan terms (like a lower interest rate).

RESPA: Real Estate Settlement Procedures Act allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a closing. The law requires lenders to furnish the information after application only.

Second mortgage: a mortgage made subsequent to another mortgage and subordinate to the first mortgage.

Survey: a measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings.

Title: a document that gives evidence of an individual’s ownership of land.

Title insurance: a policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often bome by the purchaser and/or seller.

Title search: a check of public records to be sure that the seller is the recognized owner of the real estate and that there are no unsettled liens or other claims against the property.

Truth-in-lending: a federal law requiring disclosure of the annual percentage rate charged to home buyers shortly after they apply for the loan.

VA loan: a long-term, low- or no-down payment loan to veterans guaranteed by the Department of Veterans Affairs.

Verification of employment (VOE): a document signed by the borrower’s employer verifying his/her position and salary.