When Divorce is Part of Your Real Estate Transaction

VIBE recently hosted Brett Leschinsky, a Senior Loan Officer with CrossCountry Mortgage, to learn how divorce affects real estate transactions. We wanted to find out how different lenders treat divorce situations, discover if child support can be counted as qualifying income and get tips for divorcing sellers and agents. Read on for all that information and more.

Question: Do all lenders treat a divorce situation the same?

Answer: No! This is a great question. Many lenders have overlays on Fannie/Freddie guidelines when it comes to divorce, especially banks. Mortgage companies don’t tend to have these overlays. An example of an overlay is Fannie may allow a divorcing client to purchase a house before the divorce is final, but banks overlay that and require the divorce to be finalized. In general, banks are not good places to get a loan surrounding a divorce.

Question: How is the equity in our home handled if we are both entitled to a share of it?

Answer: If home equity needs to be borrowed to pay off some or all of the marital obligation, there are two ways to do it. First, you can refinance your first mortgage and take cash out so you have a new, larger first mortgage. The other option is to obtain a second mortgage for the amount you need. There are many factors that go into which of these two options is the best for your situation so you will want to work with a trusted mortgage professional. 

Question: Is it possible to purchase a home before a divorce is final?

Answer: Yes, but there are a few caveats. The main items are: 

1. If your name is on the marital home loan, you’ll need to have enough income to qualify for both homes because you won’t have a divorce decree indemnifying you from the payment on that home.

2. You’ll need to have enough funds for a down payment (minimum is typically 3%-5% down) as you likely won’t have received your portion of the marital home’s equity from the marital settlement (typically received after the divorce).

3. You’ll need to work with a non-bank lender as banks won’t close on a mortgage transaction prior to the divorce being finalized.  

Question: Can I count my child support toward my income when qualifying for a loan?

Answer: Yes, but only if it meets certain parameters, which are actually the same parameters used if you’re utilizing spousal maintenance as qualifying income. Child support or spousal maintenance payments have to be received for six months and they have to be expected to continue for three years from the closing date for the mortgage.

Question: What are some caveats that would be useful for divorcing sellers to know?

Answer: If you find out that a buyer is in, or recently went through, a divorce, make sure the lender for that buyer understands divorce transactions. Unfortunately, most don’t.

Question: Anything else that would be helpful for agents to know?

Answer: If a buyer was recently divorced but their name is still on the old loan, they should be able to qualify for a new home without using that debt against them (assuming the divorce decree indemnified them from the old mortgage payment). This means they don’t have to wait to purchase.

Question: If there are questions an agent can't answer for buyers to sellers, who should they contact? 

Answer: I’m always happy to help people navigate their divorce situation, even if I’m not getting business from it. You can reach me here:
Phone: 612.590.7896
Email: brett@mortgageforest.com