It’s been months since you and your spouse moved into separate residences. Even more months have gone by while you went through the divorce process. You finally went to court, or made an agreement as to all of the details that you needed to make to hit the ground running to finally start leading your new life. Or did all of the details get covered?
Your existing mortgage company is not necessarily going to be persuaded to change their contract with you just because you have a shiny new divorce judgment. Details that you really didn’t want to bother with when you were negotiating out custody may have consequences in your ability to get a mortgage for years down the road.
Let’s start with the start of a divorce – filing for divorce. Once a divorce filing becomes public record, an underwriter views it as an existing lawsuit, with an unknown outcome. Since a borrower’s qualification is determined in part by the portion of income that is going to pay fixed, monthly obligations, and there is a possibility of spousal support or child support to add to those liabilities, the underwriting process stops and no loan will be issued until the final judgment is signed by a judge and entered into record. A lender cannot determine a debt to income ratio until there is a number placed on the liability. The mortgage company doesn’t know what is ultimately going to happen in the divorce as to a distribution of property, and until the divorce is done, you can’t refinance, or even get a new mortgage. This probably doesn’t make any sense to the parties going through a divorce. If you agree who is going to get the house, but have to work on parenting time issues, why can’t you take care of one issue at a time? You can sell the house by mutual agreement, but a lender will probably not agree to lend to you until the divorce is final.
Once there is a final judgment of dissolution which clearly identifies your assets and your obligations, then a mortgage company will start talking to you. Even if you just tell your mortgage broker that you plan on getting a divorce and want to get the house refinanced before you file, your mortgage broker may have a legal and ethical obligation to inform the underwriter. If you are going to refinance before a divorce is filed, you are better off to state that you are refinancing to restructure your existing debt. In that way, you are not making an untrue statement. Who knows what the future holds, maybe the divorce won’t happen after all, or your spouse will die and avoid the need for a divorce.
Payment history: If you and your spouse are jointly liable for the mortgage, even if your spouse is the one living in the marital residence pending the divorce, you need to check with the mortgage company to make sure that the mortgage is being paid. If it isn’t paid, even if there is a court order that says your spouse is supposed to pay the mortgage pending the final divorce, the mortgage company may not care. The mortgage company wants the contract to be fulfilled, and if you are looking for a new mortgage, the new lender will most likely care about consistency of payment and your financial stability in deciding how to assess your risk. The same is true of any other debts which are jointly held – credit cards, lines of credit, utility bills, the list goes on. If your name is on the debt, and it doesn’t get paid, this greatly affects your credit score, and your ability to obtain refinancing or another mortgage.
Get it in writing what is supposed to happen with the house, the mortgage and other debts. More specifically, get it written into the judgment who is supposed to pay the debts, and when that person is supposed to refinance the debts to put the debts solely in that person’s name. Usually when one party is keeping the house, the mortgage is assigned in the divorce judgment to that party, and the other party is “held harmless and indemnified” from all liabilities associated with the residence. That means that you have the right to a lawsuit if the person doesn’t follow the court order. A mortgage company may not care that you have a right to a lawsuit. Rules, regulations and underwriting requirements specific to individual underwriters change frequently. You don’t know what rules, regulations or risk tolerance of an underwriter will be when you want to obtain a refinance or a new mortgage. If one party is keeping the house, make sure that your divorce judgment has a provision that specifies when the party is required to refinance the house to remove the name off the mortgage. More importantly, make sure that if the party attempts refinance and is unsuccessful in doing so, or fails to make the mortgage payment, that the court retains jurisdiction over the house until such time as the house is sold, and that the house must be sold. Make sure that there is a provision that requires that the house be sold if there are missed mortgage payments or unsuccessful refinance attempts, and has a specific timeline attached to it. If you specify the legal remedy, you can enforce the divorce judgment. If you don’t specify, or retain jurisdiction, you may be stuck in terms of not getting your name off the mortgage.
There is also a question as to whether one spouse can refinance in his or her separate name with only one income. Sometimes an underwriter will accept a declaration that while the assets are held jointly, the borrower has complete control of them and can use them as the borrower sees fit, but that could put you as the borrower into a financially difficult position if your control over the assets isn’t as absolute as you swore under penalty of perjury it would be. There can also be agreements written that the title will be kept in joint names as leverage, including in the divorce judgment. However, when you refinance or apply for a mortgage, there is usually a provision that you have to declare under penalty of perjury that there are no other agreements or obligations, when in fact there is, often the divorce judgment which is public record.
The amount and duration of support, both spousal support and child support can also be an issue for both the person paying the support and the person receiving the support. If you are relying on support to qualify for a loan, the duration of support must be long enough, three years in duration from the time of the loan to qualify for Fannie Mae (called a continuation). There is also often a requirement that there be a history of the support being paid. If you just finalized the divorce, you may not be able to use the support to qualify for a loan until you have received the support for 6-12 months, and can show that the support payments were made on time. If you are the person paying support, the amount of support that you are obligated to pay is going to affect your debt to income ratio, and may prevent you from qualifying for a mortgage. If you are the obligor, you also need to be able to show that there is no outstanding support obligation.
Sometimes you can persuade an underwriter to take the risk of lending you money if you have written records. Don’t assume that after the divorce that your relationship with your ex-spouse is going to improve, and he or she is going to suddenly get more cooperative. If you weren’t getting along enough to stay married, it doesn’t get any better particularly after a divorce, especially when there is money involved. If you have an obligation to pay support, don’t count on your spouse agreeing to sign a satisfaction of judgment to prove that you are current on your spousal support. Keep records of all of your payments so that you can bypass an underwriter’s requirement of a satisfaction of judgment if your ex won’t cooperate. The same is true of any joint debt. If your spouse was supposed to pay off the credit card debt, and get your name off it, keep records of your agreements even if it is by “memorializing”, meaning that you write to your spouse and say “I am confirming that you agreed to get the Sears debt paid off by June 1”.
In your divorce judgment, it is also a good idea to make asset and liability divisions as clear and disentangled as you possibly can, even if you and your spouse are on good terms. For example, your spouse may need income, but you want the asset. So you agree that you are awarded the asset and the debt, but you have an obligation to pay your spouse the rent from the property for a particular period of time. That may make sense in the divorce context, but it will not make sense to an underwriter, who is going to view it as a pending lawsuit, even if there is no dispute, or at the very least a cloud on the title.Even if you feel emotionally exhausted as you go through the divorce, keep an eye out to the future, particularly if you want to be able to refinance or obtain a mortgage after the divorce. If you don’t, you may find yourself getting divorced all over again, and struggling with all of the same issues all over again when all you want to do is move on, and start your new life.