Buying a new home after a divorce can be tricky, but with the help of a Certified Divorce Lending Professional (CDLP®) and the right verbiage in the settlement agreement, it can be done. One of the main concerns when one party retains the marital home is that the vacating spouse may not qualify for future mortgage financing while their name remains on the current mortgage. This isn’t necessarily so, and with the correct verbiage in the final divorce agreement, we can help our divorcing clients overcome this issue.
The Borrower and Contingent Liability
When a borrower has outstanding debt assigned to another party by court order (such as a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender may not be required to count this contingent liability as part of the borrower’s recurring monthly debt obligations.
Contingent liabilities are debts that a court orders one party to pay, yet the legal obligation to the creditor remains. In a divorce, often the mortgage cannot be refinanced, and the marital home is not being sold. When the final divorce decree states that one party shall be responsible for making the mortgage payment, including taxes and insurance, it is considered a court-ordered contingent liability. This can be viewed in various ways when the non-responsible party seeks new mortgage financing.
Role of a CDLP® in Managing Court-Ordered Debt Assignments
While many investors have their own guidelines or ‘overlays’ to Agency underwriting guidelines, a CDLP® will know how to handle a Court-Ordered Assignment of Debt.
A mortgage professional working with divorcing clients must understand that choosing an investor for their borrower can impact tax planning in the divorce settlement and avoid potential Capital Gains taxes on the future sale of the marital home. A CDLP® considers tax planning in conjunction with the effect of the mortgage product and investor chosen.
Understanding Mortgage Guidelines:
- Fannie Mae: As long as the final documents state who the responsible party is, the contingent liability will not be considered in the other party’s debt-to-income ratio.
- Freddie Mac: As long as the non-responsible party has been removed from title/ownership, the contingent liability will not be considered in the debt-to-income ratio.
- FHA: If it can be documented that the responsible party has made twelve consecutive payments after the orders, the contingent liability will not be considered in the debt-to-income ratio for the other party.
Property Settlement Buyout and Contingent Liability
Another consideration is what happens to the contingent liability when there has been a property settlement buyout other than refinancing the other spouse off the current mortgage. Fannie Mae guidelines state that when a borrower’s interest in a property is bought out by another co-owner (often in a divorce settlement), but the lienholder/lender does not release the borrower from liability, the borrower has a contingent liability. If the lender obtains documentation to confirm the transfer of title, this liability does not have to be considered as part of the borrower’s recurring monthly obligations.
Occasionally, one spouse may have the cash available to buy out the other party’s ownership in the marital home. Rather than refinancing the current mortgage to avoid unnecessary fees or higher interest rates, the spouses may agree to leave the current mortgage in place.
However, some spouses will not agree to take their name off the title because their name is still on the current mortgage. Keep in mind that if the equity is bought out in cash or another form, the vacating spouse may need to come off the title to qualify for future mortgage financing, which may affect any tax planning contained in the final divorce settlement.
Do You Have Questions About How Divorce Can Impact Mortgage Financing When Buying a New Home?
A Certified Divorce Lending Professional's (CDLP®) knowledge and experience can make the transition of buying a new home much smoother and more successful for all parties involved.
Working with an experienced mortgage professional who understands how divorce affects mortgages benefits both the divorce team and the divorcing homeowners. Traditional thinking does not apply when working with divorce and mortgage financing.
Always Work with a Certified Divorce Lending Professional (CDLP®)
When dealing with divorce and real estate or mortgage financing, always work with a Certified Divorce Lending Professional (CDLP®). Their expertise ensures a smooth and successful transition during the divorce process.
This is for informational purposes only and not to provide legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided 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 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
