Step-by-Step Guide to Divorce Mortgages | FAQs

Divorce Mortgage and Real Estate Advice

Divorce isn’t an easy process, no matter who files or why the marriage is coming to an end. It’s especially difficult when the couple shares a primary residence, and may also own rental properties and/or a vacation home, as all property must be divided fairly and equitably. In the case of the marital home, that means at least one spouse needs to make other living arrangements.

Next Act Properties, Inc. provides real estate and mortgage solutions for divorcing and divorced people. The company was founded by Jeffrey Landers, a Certified Divorce Lending Professional (CDLP), Certified Divorce Financial Analyst (CDFA), and licensed mortgage and real estate broker, who has extensive experience helping divorcing couples determine the best way to divide their real estate assets. The following guide answers some of the most common questions about the marital home and explains the various options available to divorcing people.

Making Mortgage Payments During Divorce Proceedings

It may take from several months to a year or more for a divorce settlement to be finalized and for the judge to sign the final divorce decree. Lengthy divorces are especially common among couples with high-value assets, such as vacation homes, other real estate, closely-held businesses, stock options, original works of art and bank, brokerage and retirement accounts with high balances. It can also take additional time to work out child custody issues. During this time, it’s important to keep up with all mortgage payments, property taxes and other financial obligations.

If the marital home has a joint mortgage, or a home loan in both spouses’ names, both spouses are responsible for making the monthly payments. This is true even if one spouse has moved out of the home and the other spouse continues to live there. A single missed payment, even if it’s the result of an error and not any malice, can have serious consequences for both spouses. If the couple can’t agree on who should make the payments, a divorce attorney can help them negotiate a mutually acceptable payment plan without letting their emotions get the best of them.

Keeping the Marital Home

In many cases, one spouse wants to keep and stay in the home, especially if there are children involved. The best course of action depends on whether the home is paid-off or has an existing mortgage. If the home is paid-off, the spouse who wants to stay can simply “buy out” the other spouse’s share of the equity in the property. For example, someone who wants to stay in a home valued at $400,000 would typically pay the other spouse $200,000.

Most people don’t have enough cash on hand to buy out their spouse’s share of the home’s equity, so they may have to sell their share of stocks or other assets to get the funds they need. Others borrow money from family members or friends. People who are 62 years or older might want to consider a reverse mortgage if the marital home is either paid-off or has a lot of equity. For these people going through a “grey” divorce, this is an often overlooked option that can be a great solution for older divorcing people.

Refinancing the Mortgage

If there’s an existing mortgage, the spouse who wants to keep the home will, in most cases, need to refinance the loan in their name alone. Refinancing requirements vary by mortgage lender, but the applicant typically needs to have a good credit score and history and enough qualified income to make monthly mortgage payments on their own. Some people choose to do a cash-out refinance, which replaces the current mortgage with a new mortgage for a larger amount. This allows the applicant to pay off the existing loan and have some cash left over to buy out the other spouse and/or pay other expenses.

However, if the spouse keeping the home has been on the title for at least the previous 12 months, an equity buy-out refinancing might be a better option. If they qualify, not only will the interest rate be better, but unlike a cash-out refinancing, they will be able to take out much more than the 80% of the appraised value of the home, which is the maximum amount for a cash-out mortgage. The important thing to keep in mind, is that every penny of the equity buy-out refinancing must only be used to pay off the existing mortgage and to buy out the other spouse’s share of the home’s equity. The spouse keeping the home cannot receive any of the proceeds – not one cent!

Required Documentation

Among the many documents a lender might request, the spouse who wants to refinance will need to provide some, or all, of the following to the mortgage lender:

•     Tax returns
•     Bank statements
•     Proof of income (pay stubs, W-2 statements, financial statements from a business, etc.)
•     Credit scores and reports (the mortgage broker or lender will obtain these directly)
•     Actual copies of the full Divorce Settlement Agreement/Divorce Decree
•     Proof of child support and/or alimony payments, if applicable
•     Children’s Birth Certificates
•     Documentation related to credit cards, personal loans and other debts
•     Anything else the lender might request

Credit Requirements

Although each lender sets its own minimum requirements, a spouse who wants to refinance an existing mortgage in their own name may have to meet the following criteria:

•     Credit score: Conventional loans are typically reserved for borrowers with scores of 620 or higher.
•     Credit report: Before refinancing a mortgage, the mortgage broker or lender will order the applicant’s credit reports from all three major bureaus. An applicant without much of a history may have to work on establishing credit before qualifying for a new loan. Applicants with bankruptcies, delinquent accounts, late payments and other negative items on their reports may not qualify for refinancing. Lenders want to see that an applicant has a strong history of on-time payments and isn’t carrying too much debt.
•     Debt-to-income ratio (DTI): DTI is calculated by dividing your total monthly debt payments by your monthly gross income. A low DTI makes it more likely you’ll be able to afford your monthly mortgage payment, while a high DTI makes lenders worry you won’t be able to make the mortgage payment and keep up with your other obligations. Some lenders want a DTI under 36%, while others will lend to borrowers with higher DTIs. Applicants with high DTIs should be prepared to pay higher interest rates. If an applicant’s DTI is too high, the lender is likely to deny their application for refinancing.

Treatment of Child Support Payments and Alimony Payments

To the surprise of many applicants, child support and alimony payments aren’t always treated as qualified income when it comes to applying for new mortgage loans or a refinancing of an existing loan. In fact, in most cases, child support and alimony aren’t counted at all unless they’re included in a Separation Agreement, Divorce Settlement Agreement or Divorce Decree. To qualify as income, the payments must also meet the “6/36 rule.”

According to this rule, the applicant must prove they’ve received consistent and on-time payments for at least six months prior to the closing and will continue receiving the payments for at least three more years (36 months) after the closing date of the mortgage. Child support and alimony are considered separately, so the 6/36 rule is applied to each type of payment. If an applicant has received six months’ worth of alimony and only five months’ worth of child support, the child support payments may not be counted as qualified income. Also, if a child is going to reach the age of emancipation (18 or 21 years old depending on the State) in less than 36 months after the mortgage closing, that child support payment will not qualify since it doesn’t pass the 36 months portion of the 6/36 rule. (That’s why you have to provide the Birth Certificate for each child).

The Importance of Refinancing the Current Mortgage

Refinancing is often required because it removes the spouse who is not keeping the home from the mortgage. If both names remain on the loan, both spouses are legally responsible for the monthly payments. Removing the other spouse’s name from the mortgage eliminates the need for a divorced couple to continue communicating regarding mortgage payments and other related issues. In addition, the spouse who is not keeping the home may not be able to get a mortgage for a new home if they are still obligated on the old mortgage.

Selling a Marital Home

In some cases, the divorcing couple decides to sell the family home. Selling is a good option if neither spouse can buy out the other spouse’s share of the home’s equity and/or refinance the mortgage into their own name or if they’d prefer to save money by downsizing or moving to a different neighborhood with lower costs of living. It’s also appropriate if both spouses want a fresh start in separate homes that don’t contain daily reminders of their marriage.

Selling a Home With an Existing Mortgage

If the home has a mortgage on it, one of the first steps is to contact the lender and request a payoff quote. A payoff quote shows the total mortgage balance, which includes the principal balance, accrued interest and any applicable fees. Although home prices are typically based on location, the condition of the home and local market conditions, getting the payoff amount ahead of time can help the divorcing couple determine how much they need to make on the sale to pay off the mortgage and cover any other financial obligations.

It’s also important for a divorcing couple to determine how much equity they have in the home (Equity equals the market value of the home minus all mortgages and liens). Homeowners typically increase the equity they have in the home when they make their loan payments, as each payment reduces the principal balance of the mortgage by a small amount. The lower the mortgage balance, the more  equity is in the home. Equity may also increase or decrease based on market conditions. For example, if a couple buys a house in an up-and-coming neighborhood, the value of the home is likely to increase as the neighborhood becomes more desirable.

Once the home sells, the couple can use the proceeds to pay off the mortgage and other selling costs such as real estate commissions. If any funds are left over after the mortgage and other selling expenses are paid, they may use the money to pay-off other existing debt or make down payments on separate properties. The couple may also split the proceeds and use the money for their own personal expenses. It all depends on the terms of the Divorce Settlement Agreement.

Selling a Home Without a Mortgage

Selling a home without a mortgage is a bit easier because there’s no need to obtain a payoff quote or worry that the sale price won’t be high enough to pay off the current mortgage and have enough left over to get a fresh start elsewhere. Once the home sells, the couple will be able to keep the proceeds after selling costs  and split them according to the terms of the Divorce Settlement Agreement.

Working With a Divorce Real Estate Expert

Whether the home has a high mortgage balance or no mortgage at all, it’s important to work with a real estate agent who has training and experience in working with divorcing couples.

Selling real estate in a divorce situation is very different from your typical real estate sale. You may have a divorcing couple who are not on speaking terms with each other, or you may even have a situation where one spouse is trying to sabotage the other spouse by trying to kill any possible sale.

An experienced divorce real estate expert knows how to remain neutral and how to gain the trust of both parties by being transparent and having equal and open communications with each spouse. The agent should represent the interests of both spouses and give each spouse the same amount of information about each step in the process. Each spouse should feel the agent is working hard to sell the home. The agent should be able to put both spouses at ease and moderate any disagreements that occur while the home is on the market.

Finally, these divorce real estate agents also need to have a good understanding of family law and they need to have experience working with divorce attorneys. In some cases, they may even need to testify in court if one spouse is being totally uncooperative.

Frequently Asked Questions About Handling Real Estate in a Divorce

Is an appraisal required to sell a marital home?

It’s wise to get a real estate appraisal before putting a home on the market, as an appraisal is a professional’s opinion of the market value of a home. Getting an appraisal can help a divorcing couple set an appropriate asking price for their home and avoid disputes over property division. If a couple decides to sell their home, for example, an appraisal helps determine how much money each spouse can expect to receive once the sale is finalized.

An appraisal is different from the comparative market analysis (CMA) prepared by a real estate agent, as a CMA is just an estimate of the home’s fair market value. The appraised value of a home is based on several factors, including local comparable sales and the condition of the home. An appraiser also considers the size of the home, the size of the lot, the number of bathrooms and the number of bedrooms.

If a divorce is particularly contentious, each spouse may want to hire their own appraiser. It may also be necessary to order a historical appraisal to determine what the home was worth when the couple got married. Historical appraisals are often performed when one spouse owned the home before the marriage, however, they may also be used to determine the value of the home as of the Date of Separation or some other previous point in time.

If one spouse is keeping the home and will be refinancing the mortgage, the lender will require their own appraisal. Any other appraisals will not be accepted by the lender.

When should a divorcing couple sell their home?

It really depends on the couple’s financial situation and personal desires. From a financial perspective, selling is wise if neither spouse has the financial resources needed to refinance the existing mortgage or make monthly mortgage payments on their own. Even if one spouse wants to stay, it may be necessary to sell if there’s no way to buy out the other spouse’s share of the equity in the home. On a personal level, many people find it difficult to remain in the marital home once the divorce process ends. Selling allows both spouses to move on from the relationship and make new memories in their own homes.

If the divorce is already in progress, but not yet finalized, the lawyers may want the proceeds of any home sale to be held in escrow until all the other terms of the divorce are resolved.

Is keeping the marital home a good idea?

Again, it depends on the couple’s financial and personal circumstances. If one spouse can afford to buy out the other spouse’s share of the home’s equity and refinance the mortgage into their own name, keeping the home may make sense. For families with children, keeping the marital home will be less disruptive for the children and will offer them a sense of stability during a very tumultuous time. The children will be able to stay in a familiar environment, keep their friends and continue attending the same school instead of having to start over in a new neighborhood.

What if I want to refinance and don’t qualify for a loan?

Not every applicant qualifies for refinancing, usually due to low credit scores, insufficient qualified income, too much debt or a lack of assets. A refinancing application may also be denied if the ratio of the mortgage loan to the home’s value (LTV) is too high. If one spouse wants to stay in the home and doesn’t qualify for a refinancing, it may be possible to pay-off the mortgage and buy out the other spouse’s share of the equity in the property. Of course, that would require a substantial amount of cash, so this option would not be available for the vast majority of people.

Is it possible for a divorced couple to continue owning a home together?

Yes, it’s possible, but we absolutely don’t recommend it. It’s very likely to lead to a continuation of conflict even after the divorce has been finalized. Divorced couples may disagree about who’s responsible for paying the property taxes, performing home maintenance, or hiring contractors to make repairs. If one person wants to rent out the property, they have to get the other person to agree. Divorced spouses may even have disagreements over minor changes to the home’s appearance, such as exterior paint colors or whether to use asphalt shingles or slate when it’s time to replace the roof.

In most cases, it’s better to sell the home or have just one spouse keep the home to avoid this type of conflict.

Is it really necessary for each spouse to hire a divorce attorney?

Many couples believe handling their own divorce proceedings is a good way to keep more money in their pockets. This is usually a disastrous mistake. Divorce is a complex legal and financial process that can have lasting and irreversible consequences on a person’s future. Just one mistake could cause one or both spouses to suffer significant losses. Therefore, each spouse should have their own divorce attorney with extensive experience in family law.

Your Next Act

If you’re going through a divorce, it’s important to think financially, not emotionally, especially when it comes to your marital home.

Next Act Properties will discuss your various options with you and your divorce attorney and help you decide on the best course of action for your specific circumstances.

If you would like to keep your home, we will help you determine if that’s possible and if it is, we’ll work with you and your divorce attorney to structure your Divorce Settlement Agreement in a way that will give you the best chance to refinance the mortgage into your own name and allow you to buy-out your spouse’s share of the home’s equity. Our divorce mortgage experts will then help you arrange the actual refinancing.

If you will not be able to buy-out your spouse and/or refinance the mortgage or if you just want to sell, then our divorce real estate agents will help you do that in the quickest and most profitable way.

For more information, please contact Next Act Properties at (800) 795-2445 or email us at info@nextactproperties.com