The Mortgage Brothers Show
How to Navigate a Mortgage After a Divorce
It should be noted that Arizona is a Community Property State (50/50 Ownership).
- Find a good attorney, financial planner, and mortgage broker
- The MOST TYPICAL SCENARIO THAT WE SEE is that one spouse stays in the home and refinances the other spouse out. Did you know that you can do a refinance and take cash-out to pay a spouse off with no pricing hit or LTV hit for cash-out if equity needs to be paid to ex-spouse per decree?
Income (Alimony & Child-Support)
- NEED 36-month Continuance (for all programs)
- Conventional Loan = must have at least 6 months receipt
- FHA & VA Loan = must have at least 3 months receipt
- Jumbo Loans = must have at least 12 months
Debts (Alimony & Child-Support)
- Decree overrides what is in the credit report re: liabilities
- Each spouse will stand alone and will need to qualify based on their own credit and income (taking into account Debt to Income Ratio)
- If one spouse doesn’t earn enough, maybe think about getting a co-signer!
What documents are typically needed?
- Final Divorce Decree
- May need bank account documents from ex (so keep a good relationship is possible)
- No need to pull ex-spouses Credit (after the divorce decree)
- Quit Claim Deed (or Disclaimer Deed…if done before divorce)
*The following transcript has been edited for clarity.
Eddie Knoell — I’m Eddie Knoell.
Tom Knoell — And I’m Tom Knoell.
Eddie — Welcome everyone. This is The Mortgage Brothers Team podcast and today we are talking about something that is, of course, a sad, hard time for a lot of folks, a lot of our customers who at times will go through, which is divorce.
Tom — Yeah, divorce is always a very, very tough emotional time where you’re thinking about multiple different things. And part of it is the roof over your head. That’s one of the most critical things that you think through throughout your whole life, actually. And when you’re going through a divorce, you probably can’t help but think, what do we do with the house? So, we thought we’d have a quick little podcast on divorce and how it affects financing. Whether you’re refinancing or you’re actually looking to start fresh and purchase.
Eddie — Yeah. And Tom, you were saying I think earlier, that one piece of advice… what’s the advice that you hear a lot about?
Tom — You hear, always go after and find a good attorney, a good financial planner, and a darn good mortgage broker. So we’d love to be that mortgage broker for you. But those are, I think, three basic food groups, per se, of what you’d need in order to steer you through the right turns and twists as you go through that unfortunate event that you’re going through. So, definitely seek legal advice. We’re just here to give you some mortgage advice.
Eddie — Yeah, and I think that what we can talk about now is just what the most typical scenarios are that we see? Our borrowers who come to us, in most cases, one spouse is either going to stay in the home, this is very common, one wants to stay in the home and refinance that loan into their name alone, while the other spouse wants to, of course, get off the title, get off the current note, the mortgage, and buy another property.
Tom — Yeah, and they’ll come to us sometimes far in advance, they haven’t filed yet, but they’re thinking about filing and they want to get their ducks in a row. Or, they’ll call us several days after the decree is finalized saying, “Okay, we need to move forward.” We always recommend on the front-end side, giving us a call. We can help kind of strategize, and help you figure out the timing of how this is going to work. Because one of the key factors is once you divorce, you’re really kind of a sole and separate person, and you will act autonomously when it comes to qualifying. And so, it’d be important to know whether or not you qualify for the home that you may be staying in.
Eddie — Right.
Tom — So give us a call early.
Eddie — I would also… now I’m going to probably just state that it’s possible. A lot of our borrowers will get their financing in order before the divorce is finalized. And in many ways that just helps kind of set up everything ahead of time. Now, that is if the borrowers typically who are going to be qualifying for the mortgage, if they aren’t depending on income like child support, alimony, or any of the debts that are on their credit, if the other spouse, the ex-spouse, is not going to be responsible for those items, they can oftentimes get the refinance done, if we’re doing a refinance, before the divorce is finalized.
Tom — Yeah, good point.
Eddie — But, of course, I think that happens, and I don’t know what percentage, maybe it’s a minority, maybe let’s just say 30% of the time, people do that. But the other, majority of the times, the divorce is finalized and we would do the financing afterward. And people have asked us, too, there’s a been a lot of misunderstandings about when you can do it. If a borrower files for divorce, can we do financing? And it’s not finalized yet. The answer is yes, because in the past, lenders, banks used to say, “No, if you file, we can’t do any financing,” and you’re kind of in limbo until it’s finalized.
Eddie — But today, the understanding among the community is until it’s finalized, you’re still married and that’s it. The application itself does not ask have you filed, or are you in the middle of? The idea is that you are married and it’s not finalized.
Tom — Okay. So good point. And I will add to that. So that would apply to individuals that have separate income that they could qualify on their own for these mortgages. If you are relying on a divorce decree for alimony or child support to be that income, obviously having that decree finalized would be a critical part of the equation.
Eddie — Right. So let’s talk about that. Okay, so someone has now officially been divorced and they need child support or alimony, the moment the divorce is finalized, we can’t just give you credit for the alimony and child support. We have to actually wait a waiting period, which we call a seasoning period, but this waiting period is different for the loan programs. And Tom, maybe you can go through that.
Tom — Yeah. And I would just tell you a little frustrating bit. You’d think when a judge signs off on a decree and it states that there’s going to be $3000, or $4,000, or $5,000 worth of income monthly, you could count that immediately. And really there’s a reasonable explanation. There needs to be that history. There needs to be that look back to where one party has been successful in making those payments and is going to continue to make them. So there is that seasoning component, as frustrating as it could be, it’s there.
Tom — For conventional financing, there’s what we call six receipts. So actually six receipts are taken of that income.
Eddie — In six months.
Tom — Right. And what we’ve done in the past is we’ve started a file after the fifth month’s receipt and just waited to close until a week or so after that sixth payment is received. So, we don’t have to wait to start the application until you receive all six, but just keep that in mind. That is conventional financing.
Tom — When it comes to FHA and VA, they’re a lot more lenient. They’re half of that. And I think it’s three months receipt.
Eddie — Three months of receipt. Yeah.
Tom — Okay. And then if you want to abandon conventional financing limits and not go FHA or VA and you want to go jumbo, then you’re going to wait twice the conventional seasoning period, which will be 12 months. So, six for conventional, three for FHA and VA, and 12 months for jumbo.
Eddie — That’s right.
Tom — And the critical thing is that there is a continuance factor. Not only do you have to have received a certain amount of payments to prove that the future ones will come, but there also has to be 36 months of continuous payment remaining.
They can’t stop in 19 months or 22 months. So that’s an important piece. And Ed, I don’t know if you know how long alimony or child support typically is paid?
Eddie — Typically, it’s until the child is 18 and that’s when the judges usually will cut off on the final divorces, or the decrees. So if you have children that are 15 years or younger you’ll have three years remaining in most cases.
Tom — Right.
Eddie — And sometimes one child is going to only be, for maybe a year, maybe they’re 17, 16 years old. So we have to make sure we adjust that child support.
Tom — Okay.
Eddie — Alimony… So anyway, definitely something to think of and plan.
Tom — Yeah, absolutely. And speaking of planning, I had a borrower, they were very concerned about their credit. They knew that their credits were joint credits and that a debt, that maybe one of the spouses was responsible for, they knew was going to have some late payments. And so, they got on to the clock sooner than later and pulled credit prior to credit diminishing.
Eddie — Right.
Tom — I thought that was an interesting point. So think about the credit angle. Also, know too, we talked about the income side, but on the debt side, even if you’re responsible for certain debts and you know it’s going to be on your credit report and you’re panicking because you’ve got a Suburban and you’ve got a primary old house and a cabin up North, the decree will dictate what liabilities are against you. So, that’s one of the few times the credit report will subordinate to something. That decree is really the final say. So, if it says the one spouse is responsible for the Suburban and the second home, it doesn’t matter if the credit report says that you are.
Eddie — Right.
Tom — I thought that was important.
Eddie — Correct. And a lot of times that’s a reason why we would wait until you have a finalized divorce decree. Because sometimes a borrower has these items on their credit report, they have to wait until the divorce decree actually makes that that loan, that credit card, that car loan, the responsibility of the ex-spouse.
Tom — Right.
Eddie — Yes. That is good to know.
Tom — Besides the divorce decree, what other documents are typically needed? Not that this is going to be a big long list, but I mean typically we’ll be requesting what? Maybe we don’t even request, the title will request it.
Eddie — Right. So, we don’t need to pull your ex-spouse’s credit report. We typically don’t need their bank statements, but, of course, if the ex-spouse is at least amiable, if you have an amiable relationship with them and they can work with you through this, it always helps. Because there will be a quitclaim deed that they will sign at the title because if they’re on the title, they’re going to need to sign off. Of course, anyway, so as far as documents, I would say that the divorce decree, maybe some bank statements, maybe the ex-spouse would provide because we might have to prove the deposits, like where the alimony or child support came from. We have to be able to track that it came from the ex-spouse.
Tom — Right. Couples can have multiple bank accounts and if there was payment made out of a joint account, but one of the accounts went with one of the spouses, and then that could be a way of kind of tracking that, yes, this account actually belongs to the husband. I mean, we can show proof… Or to the wife.
Eddie — Yeah. I mean, ideally, if the transaction history of the borrower actually has the information on there, that really helps, too, for the payments.
But yeah, I think that at the end of the day there’s a quitclaim signed, so your ex-spouse is now officially off the property, the mortgage is in your name alone, you own the home alone, and that is something we can help you with. If you have any questions let us know, everyone’s situation’s going to be a little unique.
Tom — Speaking of unique, this is something that we do a lot of, which is just a benefit of working with a group like us. But, if you structure the loan the right way, you can actually refinance and do a cash-out without getting any pricing hits for the cash-outs.
You can actually do a rate and term refi, which is a lower interest rate, even though you’re technically doing a cash-out in order to pay off your spouse for his or her portion of the equity.
Eddie — Yeah, that’s right. So to summarize, if the judge, if the court says that you owe, it’s court ordered that the equity, a certain equity portion, goes to your ex-spouse, the cash-out transaction, the cash-out refinancing that we would do on that loan, would be priced not as a cash-out, but as a rate and term refinance. So, it’s a lower interest rate.
Tom — Right. And it’s one of the few exceptions that ever a cash-out is treated, which I think is a really nice, maybe not benefit, but it’s a little consoling to know that at Fannie Mae understands and Freddie Mac understands.
Eddie — Yeah. And so, we can go up to 90%, on conventional loans, we can go up to 95% loan-to-value on the rate and term refinance. Whereas the cash-out’s limited.
Tom — Right. So not only do you get the benefit of the pricing, the interest rate, but also the LTD. And that’s huge. So, hopefully, this was somewhat helpful.
Eddie — Yeah. If anyone has any questions, let us know. I think that we’ve covered everything that I think was helpful and we hope you have a good week. Tommy, time to go home. Bye everyone.
Tom — Yeah, let’s go home. All right. Thank you, folks.
Eddie — Hey guys, thanks for listening to The Mortgage Brothers show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@azmortgagebrothers.com, or yours truly at Eddie@azmortgagebrothers.com. And be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you and help you through the whole process.
Signature Home Loans, LLC does not provide tax, legal, or accounting advice. Its material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Signature Home Loans, NMLS# 1007154, NMLS# 210917 and 1618695, equal housing lender.