Mortgage Tips for Couples Dealing with Divorce/Separation – Part 3
The purpose of this article is to provide existing, and even potential homeowners who are, or soon will be dealing with divorce with some mortgage tips to help simplify the process of moving forward financially. Before going forward, I have to acknowledge that I am not a divorce lawyer, and therefore, the information provided in this article simply relates to qualifying for a mortgage post-divorce; whether for buying out a spouse to take ownership of the matrimonial home, or to facilitate purchasing a home on your own after the divorce. The mortgage tips contained in this article solely relate to mortgage qualification.
As we have discussed before, mortgage qualification is based on 3 primary factors:
Down Payment/ Equity
These three factors remain paramount when it comes to applying for a mortgage during/after a divorce, and therefore, proper attention must be paid to all three. In this Part, we will provide you with mortgage tips related to credit management during a divorce/separation.
In Part 1 we discussed how to protect your credit for the purpose of future mortgage qualification. In Part 2 we discussed how a divorce/separation can affect your ability to qualify for a mortgage in relation to your income situation. In Part 3 here, we will be discussing how down payment/equity is affected by a divorce/separation.
Mortgage Tip 1: Formalize the equity structure of your matrimonial home
The biggest obstacle facing divorced/separated individuals who are looking to qualify for a mortgage is the existence of a mortgage on their matrimonial home. In some cases, the divorcing/separating couple may choose to sell the matrimonial home, and split the sale proceeds, while others may choose a situation where one party ‘buys out’ the others’ share in the home. In both cases, in order for you to qualify for a mortgage after a divorce/separation, you’ll need to have a written agreement in place, outlining what will be happening with the matrimonial home, and what share of the debts/profits will be the responsibility of which party.
The reason why having a written contract in place is important is because the existing home’s debts have to be included when you will go to apply for your next mortgage. A home’s mortgage payments, property taxes, and condo fees are all expenses that are treated just like car loan payments, and credit card debt by mortgage lenders. In order to qualify for a mortgage, mortgage lenders evaluate a homeowner’s ability to manage their existing debts, along with the new payments associated with the mortgage you are applying for. If you don’t have a contract in place, you will not be able to qualify for the lowest cost options that would otherwise be available to you. Before you can qualify for a mortgage after a divorce, you’ll need to decide who keeps the house, and who gets paid out.
Mortgage Tip 2: Equity Payouts can be financed
Once the equity structure of the matrimonial home is formalized, the individual who is retaining ownership of the matrimonial home will often times need to come up with a lump sum payment to the ex-spouse whose name is being removed from title. These types of equity payouts can come by way of refinancing the matrimonial home.
In normal situations, refinances are capped at 80% of the value of a property, however, for the purpose of a spousal buyout involved in a divorce, refinances are allowed up to 95% of the value of the matrimonial home.
In order to qualify for a mortgage after a divorce/separation you need to formally agree on who will retain the house(if it isn’t sold), and who will be paid what. Once you have agreed upon that, and are able to provide your mortgage broker with a written agreement confirming this, you are ready to be able to qualify for a mortgage.