This article by Lisa Prevost in The New York Times may be of interest.
Divorce and the Shared Mortgage
Deciding what to do with the house can be a major quandary for couples getting a divorce, particularly when they share a mortgage.
When there is equity in the home, each spouse typically wants to take a share as part of the settlement agreement. But if one person wants to remain in the home, rather than sell it and split any profit, then that spouse will likely have to qualify for a mortgage on his or her own.
Spouses who choose to stay may have to refinance their mortgages in order to cash out enough equity to pay off an ex. But even a spouse who has the financial resources for a buyout without drawing on home equity will still probably have to get a mortgage in his or her name.
“The person walking away wants their share of the equity, but also wants their name off the mortgage as soon as possible,” said Kathleen B. Connell, a family law lawyer and lecturer in Atlanta.
The mortgage obligation can tie up that person’s credit, and “if there’s a default,” Ms. Connell added, “the mortgage company is going to sue them both, regardless of what the divorce agreement says.”
One of the first questions to be answered, then, is whether a spouse who wants to keep the house or apartment can qualify for a mortgage independently. And if so, would that spouse be able to afford all the other expenses associated with living in that home?
“The really important thing for both parties is to flesh out all of their expenses — how much it really costs,” said Cynthia Thompson, the founder of Divorce Planning Solutions, a financial planning firm in White Plains, N.Y., specializing in divorcing clients. “Not just the mortgage but every detail.”
Ideally, this preparation should happen early on in the divorce process — too often, Ms. Thompson said, people are “arguing, litigating, fighting, having no idea of the whole picture.”
Ms. Thompson frequently advises her clients to find out how much mortgage they can qualify for while divorce negotiations are ongoing. This information can be key: If they discover, for example, that cashing out equity will raise the mortgage to an unaffordable level, they might instead seek to divide some other asset differently to compensate for the equity share, she said.
Both parties might also agree to give the spouse staying in the home more time to increase income or otherwise find a way to qualify for a mortgage, Ms. Connell said. This could take a few months or a couple of years, she said, adding that the shorter the financial tether to each other, the better.
“The longer you’re in bed financially with someone, when it comes to divorce, you’re just asking for trouble,” she said.
Spouses planning to count child support and alimony/maintenance as income for the purposes of qualifying for a mortgage should know that lenders will require proof of at least six months’ receipt of that income before closing, said Jody Bruns, a mortgage banker and the president of the Divorce Lending and Real Estate Association in Chicago, which trains mortgage professionals in the financing hurdles for divorcing clients.
In addition, she said, Fannie Mae guidelines require at least a three-year continuance of this income from the date of loan application.
People should not assume that their lawyers are well-versed in the particulars of mortgage guidelines, or that they know what loan underwriters will be looking for in the settlement agreement, she said.
“The important point to be made is that working with a qualified mortgage professional during the settlement process can help identify many of the hurdles,” she said.
Information provided by K.O. Herston: Knoxville, Tennessee Divorce and Family Law Attorney.