One of the most significant decisions divorcing homeowners face is what to do with the marital home and other real property. Agreeing on how to manage the mortgage and property can be challenging without proper guidance from a Certified Divorce Lending Professional (CDLP®).
Factors Influencing Your Options
The available options depend on several factors, including:
- How the property was financed
- How ownership is currently held
- Disposition of the property
- Amount of equity available
- Income sources for the borrowing spouse
Common Mistakes in Divorce Mortgage Planning
Working with a mortgage professional unfamiliar with the nuances of divorce can lead to common mistakes. Here are two prevalent errors:
Mistake #1: Cash-Out Refinance for Equity Buy-Out
Misconception: "If the couple has equity in the home, the spouse keeping the house should apply for a cash-out refinance to pay their ex-spouse their share. It may involve a cash-out refinance first, followed by a home equity loan to cover the remaining amount due."
Reality: Mortgage Underwriting Guidelines offer a better solution. When a CDLP® collaborates with the divorce team, specific language can be included in the marital settlement agreement to classify the refinance as an Equity Buy-Out Rate and Term refinance. This approach allows access to more equity, typically capped at 80% loan-to-value with cash-out refinances, and often provides better financing terms. The CDLP® can also address any title seasoning requirements for the borrowing spouse.
Mistake #2: Leaving the Vacating Spouse's Name on the Mortgage
Misconception: "Leaving the vacating spouse's name on the existing mortgage will affect the non-resident spouse's ability to qualify for future mortgage financing, as the existing mortgage payment will be included in their debt-to-income ratio."
Reality: Working with a CDLP® can change this. When the marital settlement agreement assigns responsibility for paying an existing debt, it is classified as a Court-Ordered Assignment of Debt. For mortgage financing purposes, this classification may allow the debt to be excluded from the borrower's debt-to-income ratio, helping them qualify for a new mortgage in their name only while remaining on the existing mortgage for the marital home.
Building the Right Team
Before making decisions about the marital home and mortgage financing opportunities, it is crucial to assemble the right team. A strong professional divorce team should include:
- Divorce attorney
- Financial planner
- Certified Divorce Lending Professional (CDLP®)
The Value of a Certified Divorce Lending Professional (CDLP®)
A CDLP® brings significant value to the divorce team during the settlement process. Their background knowledge of family law, financial and tax planning, real property, and mortgage financing allows them to better support and assist both the divorce team and the divorcing homeowners.
Contact a CDLP® for Assistance
Do you have questions about how divorce may impact your ability to obtain mortgage financing? A Certified Divorce Lending Professional's (CDLP®) knowledge and experience can make the transition smoother and more successful for all parties involved.
Obtain the Divorcing Your Mortgage Homeowner Workbook
Working with a Certified Divorce Lending Professional (CDLP®) and incorporating Divorce Mortgage Planning into the divorce settlement may help both spouses secure new mortgage financing post-divorce. Contact a CDLP® today for a copy of the Divorcing Your Mortgage Homeowner Workbook. This guide will help you organize, prepare, and understand your mortgage financing position, whether you need to refinance the marital home in an Equity Buy-Out situation or plan to sell and purchase a new home post-divorce.
Disclaimer
This information is for educational purposes only and not intended to provide legal or tax advice. Consult an attorney or tax professional for legal and tax advice. Interest rates and fees are estimates for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Copyright 2023 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
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