House Divided – What You Need to Know About Mortgage Guidelines When Divorce is Involved
There are a lot of misconceptions regarding the disposition of real estate financing where divorce is concerned. The two I run across most often are 1) the difference between a cash out refinance and an equity buyout and 2) qualifying for a mortgage when a contingent liability is present.
Equity Buyout v. Cash-out
When a departing spouse is awarded an equity buyout the spouse retaining the home may have to refinance the home to obtain those funds. This is considered an “equity buyout” transaction and the guidelines and terms are different than a traditional “cash-out” refinance transaction.
Cash-out transactions are limited to 85% of the value of the home and there are also pricing adjustments to the interest rate resulting in a higher rate than a traditional “rate/term” refinance.
An equity buyout is considered a rate/term refinance as it pertains to underwriting guidelines and interest rate pricing. You can borrow up to 95% of the value of the home and there is no adjustment to the interest rate. To be considered as and underwritten as an equity buyout the divorce decree must specifically state that the marital home is to be refinanced in order to transfer to the departing spouse their share of equity. The home must also have been owned jointly for a minimum of 12 months prior to the date of the loan application.
Contingent Liabilities – omitted from liabilities when qualifying for a mortgage
A common fear and misconception when one spouse retains the marital home is that the departing spouse will not be able to qualify for a new mortgage while still obligated on the marital home mortgage. In situations where a refinance is not ordered, and the departing spouse would like to purchase a new home, the payment for the departing residence is not considered in the debt to income calculation if the debt was assigned to another party through court order. Court ordered debt is considered a contingent liability when qualifying for a mortgage. This applies to all assigned debts including mortgages, auto loans, credit cards, etc.
It’s important to remember that while the debt may have been assigned to another party any late payments reported on the debt will have an adverse impact on the other party’s credit rating. The assignment of debt does not release the other party from the liability itself. Monitoring the payment history on contingent liabilities is recommended.
It is always important to consult with a Certified Divorce Lending Professional (CDLP) when working with divorcing clients and real estate or mortgage financing is present.