Divorce can shatter lives emotionally and financially. Often, it means a shift from dual incomes to a single income source, making it challenging to cover living expenses. Each spouse now has to bear 100% of housing, utilities, and other costs, which significantly increases the cost of living.
Employees undergoing divorce face the challenge of finding affordable housing while staying close to work. According to the Society for Human Resource Management, homeowner employees are less likely to job-hop, call in sick, or miss work for unexplained reasons. Homeownership also positively impacts psychological well-being, fostering a sense of community investment.
The Challenges of Post-Divorce Mortgage Financing
We want divorcing employees to continue owning homes, as transitioning from homeownership to renting can feel like a regression, creating a sense of impermanence. Obtaining new mortgage financing post-divorce involves navigating complex intersections of family law, financial and tax planning, real property, and mortgage planning. Each divorce case is unique, making it difficult to provide one-size-fits-all solutions.
Employees' purchasing power may decrease if they are required to pay spousal or child support. Similarly, employees receiving support income may face challenges if the income doesn't qualify for mortgage purposes due to how it is paid or the duration. Even the wording in the settlement agreement regarding debt distribution, retirement accounts, and support payments can impact mortgage financing.
How Divorce Mortgage Planning Benefits Employees
Divorce Mortgage Planning takes a holistic approach to evaluating mortgage options within the context of the overall financial objectives of the divorcing parties. Working directly with the divorce team, a Certified Divorce Lending Professional (CDLP®) understands the intersection of divorce, financial and tax planning, real property, and mortgage planning. The role of the CDLP® is to help integrate the selected mortgage into the long and short-term financial and investment goals, minimizing taxes and interest expenses while maximizing cash flow.
Example of Divorce Mortgage Planning in Action
Consider John, an employee going through a divorce. His wife is retaining the marital home, and John is obligated to pay spousal support and give up 50% of his 401K. John needs to find new housing and rebuild his financial standing. Renting an apartment would not contribute to his net worth or equity. Moreover, if his wife doesn’t refinance the existing mortgage, John's ability to purchase a new home is compromised due to the existing mortgage obligation and spousal support payments.
A CDLP® can assist in this situation by ensuring the settlement agreement is worded favorably for John's mortgage qualifications. Properly categorizing spousal support can reduce John's gross income calculation instead of increasing his debt load. For example, if John's monthly salary is $10,000 and he pays 30% in spousal support, his debt-to-income ratio can be adjusted to enhance his purchasing power for a new home.
Why Proper Categorization Matters
Traditional debt-to-income ratio limits are typically 45%. Without strategic planning, John’s debt ratio, including spousal support, could severely limit his ability to secure a new mortgage. Divorce mortgage planning can work with the divorce team to structure support obligations favorably, increasing John's capacity to buy a new home.
The Role of the Divorce Lending Association
The mission of the Divorce Lending Association is to help divorcing homeowners make informed decisions regarding home equity solutions and mortgage financing opportunities during and after divorce. This support helps employees regain stability, resulting in better focus and commitment at work.
Contact a CDLP® for Assistance
Work with a Certified Divorce Lending Professional to ensure no language traps between the divorce settlement agreement and mortgage guidelines. Proper planning prevents mortgage denial due to word choices or lack of clarification. Locate a CDLP® in your area for assistance.
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.
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
Copyright 2022 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
