Divorce usually involves either the sale of the marital home or refinancing to one parties name. Sometimes one or both parties will want to purchase a new home.
Five things you need to know when refinancing or applying for a new loan after a divorce
- There could be a delay. When one party is depending on alimony, child support or other payments made under the separation agreement to qualify for a loan, he or she may be surprised that a certain amount 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 a FHA loan will be used.
- Conventional loan requirements. With a conventional loan, Income from alimony, child support or separate maintenance payments may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to the borrower for at least the most recent six months and is obligated to make payments to the borrower for the next three years. Evidence (documentation) is required.
- FHA loan requirements. With a FHA loan, if using a final divorce decree, legal separation agreement or court order, income from alimony, child support or separate maintenance payments may be considered qualifying income if the documentation shows that the payor was obligated to make (and consistently made) payments to the borrower for at least the most recent three months. If receiving voluntary payments from an ex-spouse, the borrower must provide proof of twelve months of timely payments. In both cases, proof that payments to the borrower are required for the next three years is required and evidence (documentation) is required.
- Support obligations that count as debt. If you are the payor of support obligations, these payments will be considered debt obligations and will be counted when considering ability to pay unless those obligations end in 10 months or less.
- An existing mortgage will be counted even if court docs say you aren’t responsible for the mortgage. Back when I first posted this article in June 2017, if the separation or divorce documents stated that a party is relinquishing their rights to the home and that the other party is responsible for selling or refinancing the home, a bank would sometimes not consider the mortgage as part of your outstanding debt. No more. Any mortgage debt that anyone is obligated on now has to be counted against them as a debt (regardless of what court docs show) for most mortgage types. Even when jointly owned real estate is owned free & clear…..the taxes, insurance and applicable HOA dues have to be counted as a debt. Refinancing to remove the financial obligation (and, of course, relinquishing all rights & interest in the property which is required by the refinance) is the only option now.
The above loan standards applied at the time of this blog. Mortgage guidelines can and do change at any time. What is important is to know is that divorce creates a time period in which obligations to or from a former spouse are taken into account and may delay the time in which you can qualify for a loan.
If you are keeping, selling or buying a home because of a divorce, consult a Certified Divorce Financial Analyst who can help you avoid tax and other pitfalls that can occur when this important financial decision is being made.