Helping Attorneys Navigate the Mortgage Issues That Often Arise During Divorce
Divorce often involves more than dividing assets.
When real estate is involved, one of the most difficult questions can be:
What happens to the mortgage?
A client may want to keep the marital home.
Another may need to be removed from the existing mortgage.
One spouse may need to refinance and buy out the other spouse’s equity.
The home may need to be sold.
A client may need to qualify for a new mortgage after the divorce.
Support obligations, property settlements, ownership changes, credit, income and timing can all affect what is financially possible.
At Capital Funding Mortgage, we work with attorneys and their clients to help evaluate mortgage options early in the process, before important settlement terms become final.
I’m John Madden, owner of Capital Funding Mortgage, and I have been helping borrowers with mortgage financing for more than 25 years.
My role is not to give legal advice.
My role is to help the attorney and client understand the mortgage consequences of different settlement scenarios so financing issues can be identified before they become closing problems.
A divorce agreement may say that one spouse will keep the home.
But that does not automatically mean that spouse can qualify to refinance the mortgage.
Likewise, transferring title does not automatically remove someone from responsibility for the existing loan.
These are separate issues.
That is why it can be helpful to review the mortgage situation before the final property settlement is completed.
Questions we can help evaluate include:
One of the most common goals in a divorce is for one spouse to remain in the home.
This may be especially important when children are involved, when the home is located near schools or family, or when the client wants to avoid the disruption of moving.
The mortgage question is whether the spouse who wants to keep the home can qualify for the financing necessary to do so.
We can review:
From there, we can help determine whether a refinance appears feasible and what the estimated payment may look like.
A common divorce scenario involves one spouse keeping the property and paying the other spouse for his or her share of the equity.
For example:
If a home is worth $700,000 and the existing mortgage is $300,000, there may be approximately $400,000 in gross equity before considering transaction costs or other adjustments.
If the settlement requires one spouse to receive $200,000, the spouse keeping the home may need a refinance large enough to:
Whether that can be accomplished depends on the borrower’s qualifications and the loan program.
We can help analyze the numbers before the settlement is finalized.
A deed transfer does not automatically remove a borrower from the mortgage obligation.
If both spouses are currently obligated on the loan, the departing spouse may remain legally responsible for that debt unless the loan is paid off, refinanced, assumed where permitted, or otherwise released by the lender.
This can affect the departing spouse’s ability to qualify for another mortgage.
It can also create risk if the person remaining in the home later fails to make the payments.
For that reason, attorneys may want to understand whether refinancing is realistically possible before drafting a settlement that requires one party to remove the other from the mortgage within a certain period.
A refinance may be used to:
The important issue is not simply whether a refinance is desirable.
It is whether the borrower qualifies under current lending guidelines.
We can evaluate that before the client incurs unnecessary expense or becomes committed to a timeline that may not be realistic.
Support income may be usable for mortgage qualification in certain circumstances.
However, lenders generally require documentation showing that the income is expected to continue and that it has been received as required under the applicable loan guidelines.
The exact rules vary depending upon the mortgage program.
Documentation may include:
The timing and structure of the support arrangement can therefore affect mortgage qualification.
This is an area where early coordination can be very helpful.
Just as support income may help one borrower qualify, support obligations can affect the debt-to-income ratio of the paying spouse.
If a client is expected to make substantial monthly alimony or child-support payments, those obligations may reduce the mortgage amount the client can qualify for.
That can become particularly important when the client plans to purchase another home after the divorce.
We can help estimate the likely impact before the client begins shopping.
The spouse leaving the marital home often needs to purchase or refinance another property.
That client may be dealing with:
We can review the situation and help the client understand what price range and monthly payment may be realistic.
The goal is to avoid having a client sign a lease or begin making offers without understanding how the divorce settlement affects mortgage qualification.
This is an important issue.
A borrower may still be legally responsible for the mortgage on the former marital home even if the divorce agreement assigns responsibility for the payment to the other spouse.
Whether that payment must be counted when the client applies for another mortgage depends upon the loan program and documentation.
This is another reason to review the financing before the client assumes he or she can immediately purchase another home.
Divorce can make mortgage qualification more complicated for self-employed clients.
The lender may need to review:
If traditional tax-return income does not support the mortgage needed, other financing strategies may sometimes be available, including bank-statement or other alternative documentation programs.
Some divorcing clients have substantial assets but limited traditional employment income.
Depending upon the circumstances, we may be able to evaluate:
This can be especially helpful for retirees, business owners, investors and clients whose financial lives do not fit a traditional W-2 profile.
Divorce may also involve rental properties, second homes or other real estate.
We can help evaluate financing involving:
When several properties are involved, the mortgage impact of the overall settlement can be very different from evaluating one property in isolation.
Mortgage qualification is highly dependent upon timing.
A client’s financial profile may look very different:
The order in which these events occur can affect what the client can qualify for.
That is why we encourage attorneys to involve us early when real estate and mortgage financing are important parts of the settlement.
We can help your client understand the financing implications of proposed settlement terms before those terms become final.
Our role may include:
This can give both the attorney and client a clearer picture of what is actually achievable.
Capital Funding Mortgage does not provide legal, tax or divorce advice.
Those matters remain with the client’s attorney, CPA and other professional advisors.
Our role is limited to mortgage financing and helping the client understand how proposed financial arrangements may affect mortgage qualification.
We welcome collaboration with attorneys so that each professional stays within his or her area of expertise.
Suppose a divorcing couple owns a home worth approximately $800,000 with a $350,000 mortgage.
The settlement calls for one spouse to keep the property and pay the other spouse $200,000.
The spouse keeping the property may need a new mortgage large enough to:
That might result in a new loan requirement well above $550,000.
The key question is not simply whether the settlement seems mathematically fair.
It is whether the spouse who will retain the home can qualify for the required financing.
That is the type of issue we can evaluate before the settlement is finalized.
The worst time to discover that a client cannot refinance is after the divorce agreement has already required it.
Likewise, a client may discover too late that remaining obligated on the former marital mortgage prevents qualification for another home.
Early mortgage analysis can help identify these issues while the parties and attorneys still have flexibility.
It can also help establish more realistic expectations for:
When you refer a client to Capital Funding Mortgage, the client works directly with me.
I have been originating mortgages since 1999 and have worked through many complicated financing situations involving income, credit, self-employment, investment properties, high assets and nontraditional borrower profiles.
I understand that a divorce-related mortgage is not simply another transaction.
There may be sensitive financial circumstances, strict timelines and coordination among multiple professionals.
My goal is to provide clear mortgage information so the attorney and client can make decisions with better numbers and fewer surprises.
If you represent a client who:
we are available to review the mortgage side of the situation.
The earlier we can review the financing, the more useful the analysis can be.
If you are an attorney in Pennsylvania or New Jersey and would like mortgage input regarding a client’s proposed divorce settlement or post-divorce financing needs, contact John Madden at Capital Funding Mortgage.
We can help evaluate what appears financially realistic before your client becomes committed to a course of action.
Capital Funding Mortgage
Mortgage guidance for attorneys, divorcing homeowners and clients navigating major financial transitions.
