In a divorce, we are often more focused on curing the problem at hand, i.e., distributing real property and assets, that we forget there is life after divorce. The biggest challenge is the lack of knowledge, understanding, and preparedness of how the various pieces of the divorce puzzle fit together and overlap where real property is involved.
The solution isn't as simple as who retains the marital home and who purchases a new property. Issues that need to be considered include how the structure of spousal support may directly affect qualifying income for an equity buy-out; identifying details about the real property that may impact options available for mortgage financing; considering how the phrasing in the marital settlement agreement may affect the ability for the vacating spouse to purchase a new home among other things.
Multiple perspectives are crucial to gain a complete understanding of a situation. For example, in divorce, different views on different topics can affect the divorcing spouses in different ways—either positively or negatively.
Take the following questions, for example:
- How would you calculate spousal support when the paying spouse has fluctuating income or an irregular pay schedule?
- How would you handle spousal support vs. a lump sum payout?
- How do you evaluate the home equity, the home equity solutions, and the options available?
Your perspective or solution to these questions may satisfy the parties during the settlement process; however, the answer may negatively affect either party when obtaining mortgage financing.
Collaborating with the right team players results in different perspectives and better solutions!
What is the Vetting Process in Divorce Mortgage Planning?
The term vetting has become commonplace in today's political and business world. But what does vetting mean, and how does it fit into divorce mortgage planning?
Vetting means conducting a thorough and diligent review of a person, document, property, investment, or solution. In a divorce setting, vetting the professional divorce team is a critical step to ensure they will work well with you and are both reputable and knowledgeable. The divorce team can include any of the following: the attorney, financial advisor, mediator, divorce mortgage planner, and the real estate professional.
Where does the vetting process fit into divorce mortgage planning?
Vetting the house is the 1st phase of divorce mortgage planning. The vetting process of the home and other real property goes beyond determining whether it is marital or non-marital. Whether it's the property ownership, tax status, value, and equity available, the vetting process includes examining specific details of the marital home or other real property. Not only are the elements discovered during the vetting process critical to the divorce settlement process, but the details of the real property may determine what type of mortgage financing is available or not available, and this has nothing to do with credit scores and income.
Divorce Mortgage Planning includes a thorough analysis of the various income sources, including employment, support income, or no income, and what we can do to create qualifying income with financial and tax planning. In addition, how is the marital or individual debt being evaluated and distributed during the divorce? With a thorough vetting process, including the house, the income, and the consumer debt, divorcing homeowners are in a stronger position to make a more informed decision regarding their home equity solutions.
Divorce Mortgage Planning and Real Property Detail Report
Undeniably, one of the most valuable reports that a CDLP® can provide the divorce team with is the CDLP® Divorce Mortgage Planning and Real Property Detail Report (DMPR).
This report provides the divorce team with details about the real property, including ownership status, deed type, property tax, valuation, ATROS, homeowner insurance, existing mortgage(s), equity status, and more.
For example, here is a snapshot of a small portion of the Real Property Details Page where Mrs. Doe will retain the marital home and refinance the existing mortgage into her name within six months post-divorce.
Stating the obvious – we have real property jointly owned by Mr. and Mrs. Doe. Looking deeper into the details of this small snippet of information, we find that title is held as Tenancy by the Entirety, which is severed and defaults to Tenancy in Common with no right of survivorship upon the entry of divorce. Rarely do we see this addressed, as it is presumed that title vesting will be changed when Mrs. Smith refinances the property in six months. However, there is a six-month window of non-joint tenancy. What happens should something happen to Mr. Doe during this window? His ownership interest will not default to Mrs. Doe but into his new estate and/or probate.
From a divorce mortgage planning perspective, we can also see that Mrs. Doe has been on title to the home for the previous 12 months. This detail determines what mortgage options are available to the borrowing spouse because of the property details and has nothing to do with her credit or income qualification. If Mrs. Doe had not been on title to the home for the previous 12 months, mortgage financing options would limit her access to equity above an 80% loan to value. For example, let's assume that there is 30% equity in the home and Mr. Doe is to receive 15% of the available equity. If Mrs. Doe is not allowed to borrow above 80% of the home's value, she would not be able to execute the equity buy-out for the complete 15% with proceeds from the new mortgage.
Additionally, this report breaks down the financial details of the proposed borrowing spouse, including income and debt analysis from a mortgage planning perspective. This is valuable information to the divorce team because not all income sources may be qualified income from a mortgage planning and approval perspective.
Depending on whether the divorcing homeowners are looking to refinance or purchase post-divorce, the DMPR provides up to four finance scenarios and options to address various equity buy-out options and/or purchase scenarios.
The CDLP® Divorce Mortgage Planning and Real Property Detail Report provides all divorce team members with an enormous amount of information invaluable to helping the divorcing homeowners make more informed decisions regarding their home equity solutions.
Ask your local CDLP® for a sample copy and demonstration!
For decades, potential home buyers and mortgage borrowers have gone through a vetting process by the mortgage lender to reduce the risk of default. Obtaining mortgage preapproval to purchase a new home has been common practice for many years. A preapproval shows the home seller that the buyer has the financial strength to obtain mortgage financing and can complete the purchase transaction. The mortgage purchase preapproval is one of the first steps for homebuyers, and it should be one of the first steps for a divorcing spouse before agreeing to refinance the marital home.
Equity Buy-out Preapproval should also be required by the spouse retaining the marital home if new mortgage financing is required. For example, a refinance needed to remove the vacating spouse from the current mortgage or when the retaining spouse needed to buy the equity ownership from the out-spouse in cash form.
Divorce Mortgage Planning is the ability to put into play the desired outcome by pairing the needs and options available while incorporating the necessary details and clarity into an executable settlement agreement to successfully obtain closure and peace of mind. Vetting the divorce mortgage planner involved is another crucial step.
Working directly with the divorce team as a supporting member, a CDLP® incorporates divorce mortgage planning into the overall process with a unique understanding of the intersection of family law, financial and tax planning, real property, and mortgage planning when real property is present.
As a divorce mortgage planner, the CDLP® can help divorcing homeowners make a more informed decision regarding their home equity solutions while helping the professional divorce team identify any potential conflicts between the divorce settlement, home equity solutions, and real property issues.
Involving a Certified Divorce Lending Professional (CDLP®) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
This is for informational purposes only and not for the purpose of providing 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. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
Copyright 2023 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.