When there is a divorce, not only does it seem like your life shatters on an emotional front, but income decreases in most cases. So you might be going from two income sources to one, AND if you think about it, the cost of living increases because now each spouse has to cover 100% of housing, utilities, etc.
When employees get divorced, they face finding new affordable housing while remaining close to the office. According to the Society for Human Resource Management, homeowners employees are less likely to job hop, call in sick, or miss work for unexplained reasons. In addition, multiple studies show that homeownership has a positive psychological impact on an individual, including an increased sense of investment in the community.
We want the divorcing employee to continue owning a home – no one wants to go from owning a home to renting again. And renting after divorce can feel like you have regressed, and it feels temporary and unsettling.
So, let's discuss the challenges of obtaining new mortgage financing post-divorce. Family law, financial and tax planning, real property, and mortgage planning have a definite intersection. Unfortunately, each divorce case is different, so it's hard to provide a black and white solution.
Employees' home purchase power may decrease when they are required to pay spousal or child support. Even employees receiving support income, depending on how support is paid, the duration, etc., may be affected when the income doesn't count when qualifying for a mortgage. Even the actual verbiage in the settlement agreement regarding the distribution of debt, retirement accounts, and support payments can play a role in obtaining mortgage financing.
Many times in a divorce, we are 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 indeed overlap.
How does divorce mortgage planning benefit your employee?
Divorce Mortgage Planning is a holistic approach to evaluating mortgage options in the context of the overall financial objectives relating to divorcing situations. Working directly with the divorce team, a 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 overall long and short-term financial and investment goals, to help minimize taxes and interest expenses while maximizing cash flow.
Here is a quick example of how divorce mortgage planning can benefit your divorcing employee.
Let's say your employee, John, is going through a divorce. His wife will be retaining the marital home, and John will not only be paying spousal support but his wife will be awarded 50% of his hard-earned 401K. John is probably feeling pretty defeated not only emotionally but financially as well.
John will need to find a new place to live and rebuild his retirement and net worth. However, renting an apartment will be an actual expense for John, with none of his monthly payments going towards his net worth and equity. After all, the interest rate on rent is always 100%. And if John's wife is retaining the marital home and doesn't refinance the existing mortgage, how will John be able to purchase a new home while still obligated on the current mortgage AND paying spousal support?
This situation is where a strong divorce mortgage planner, a Certified Divorce Lending Professional, can help. CDLPs work directly with the divorcing employee AND their professional divorce team to strategically set the divorcing homeowner up for success. For example, in John's situation, a CDLP® can work directly with the divorce team to ensure the verbiage in the settlement agreement works in John's favor for obtaining new mortgage financing. The specific wording in the agreement may not only remove John's debt load of the existing mortgage for obtaining new mortgage financing, but we can make sure spousal support is correctly categorized to benefit John's mortgage qualifications.
If support obligations are categorized correctly, we may be able to reduce the spousal support from John's gross income calculation rather than as a real hit to his debt load. Without going into a complete income analysis, it doesn't have to hurt as badly if handled correctly. For example, let's say that John's monthly salary is $10,000, and his ex-spouse will receive 30% of his income. Traditionally, John's debt to income ratio is already at 30% without considering existing debt AND a new housing payment.
Why does that matter?
Because the typical total debt to income ratio is only 45%, leaving very little room for John to buy a new home. By implementing divorce mortgage planning, we can work with the divorce team and strategically categorize John's spousal support obligation while increasing his purchase power on a new home.
The mission of the Divorce Lending Association is to help divorcing homeowners make more informed decisions regarding their home equity solutions and mortgage financing opportunities during and after the divorce. In the end, the employee feels more connected and has somewhat of a solid footing again. And when employees have a renewed sense of stability, they are more focused and committed at work.
Contact a CDLP for Assistance
Work with a Certified Divorce Lending Professional to make sure there are no language traps between the intent of the divorce settlement agreement and mortgage guidelines. It is much easier to get it right the first time than risk mortgage denial because of word choices or lack of clarification. Here's some help tracking down a CDLP in your area.
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.