Divorce Mortgage Issues MN – Reference Guide
Quick Reference Guide for Divorce Mortgage Issues in Minnesota
In a divorce, there are many issues that can impact either or both parties’ ability to buy or refinance a home. This quick reference guide addresses some of the major issues I see every day. It is not intended to be a full presentation. Please contact me with case specific questions.
Here is a list of items I think every family law attorney should know:
The Old Home & Loan
a. Yes – it is possible for a vacating spouse to purchase a home and not count the old loan payment in qualifying ratios, even if their name is still on the old loan. The requirements to exclude the old payment are: title transfer and stating payment obligation.
b. The court signed decree must specify the other spouse is awarded the home, will execute a QCD and that he/she will be responsible for the loan payments, taxes and insurance.
c. Important: this action of exempting the old loan payment is for qualifying for a new loan purpose only. It does not remove the liability to the creditor. If the other party defaults they will both be liable and will be reflected negatively on their credit reports.
Child Support & Spousal Maintenance Income
a. Can be used to qualify, provided Receipt and Continuation requirements are met.
b. The continuation rule with all lenders is 3+ years, after satisfying the receipt component.
c. Conventional Freddie Mac & Fannie Mae loans require 6 months receipt of the income.
d. FHA will normally allow after proving received for only 3 months.
e. I recommend 4 year award durations; after 6 months there is still 3.5 years remaining.
f. “Paying the Bills” doesn’t count. Must be a documented payment via check or transfer.
g. Lump sum payments do not count. Must be timely, regular payments.
h. Get a temporary order to get the clock ticking, state in decree when payments started.
i. Determine if support income is truly NEEDED to qualify. Some clients qualify without it.
a. It’s difficult for most people to buy or refinance a home while the divorce is in process.
b. Most people need the signed decree to be able to: structure the refi as rate and term, exclude a prior home loan payment, access down payment funds (particularly from a QDRO) or to make support order permanent.
c. There is also potential for mortgage fraud. There are 2 documents signed at closing stating there are no divorce proceedings in process.
d. I suggest involving the lender early to have the loan “ready to go” once the Judge signs.
a. Unless used to purchase the home, combining two loans together is considered a cash-out transaction. This may limit the max loan amount to a lower “Loan to Value” (LTV) ratio.
b. Cash-out is restricted to 80% on a Conventional loan and 85% for FHA financing.
c. Rate and Term transactions are allowed to 95% of the appraised value on Conventional loans and 97.75% on FHA loans.
Paying Marital Lien
a. Fannie Mae and FHA consider as a Rate and Term transaction. Freddie Mac considers it a Special Circumstance Cash-Out and restrictions apply that limit the max loan to value.
b. No cash to the borrower, ex must be paid on the HUD, pursuant to the divorce decree.
c. If a lien is being subordinated to be paid in the future, but the client wants to refinance to remove the vacating spouse’s name or partial payment; the balloon date must be longer than 5 years! (Call me direct in scenarios that involve subordinating a marital lien.)
d. Label the marital lien as for equity in the home. Calling it a cash equalizer for all property can cause the transaction to be considered cash-out, restrictions might apply.
a. FHA allows for all qualifying income to come from the non-occupying borrower. Meaning the occupying borrower does not need qualifying income.
b. Freddie Mac will also allow this, but requires 20% down payment (or equity).
c. Fannie Mae requires an occupying borrower qualify on own income, so almost pointless.
d. An ex-spouse can NOT be a co-signor on a Conventional loan.
e. FHA will usually allow an ex-spouse to co-sign, only IF the parties have minor children and the purpose is to promote stability for the children.
f. Many lenders do not allow out of state co-signors/co-mortgagors.
*All information is the opinion of the author based on past client experiences and lending guidelines. There may be exceptions to every situation based on each independent lender’s policies. Information is as current as possible, but subject to change at any time.* (3/14/13)