Tuesday, June 5, 2012

Mortgage Advice During/After Divorce

                                                                                                                                                                      10/05/2012
                                          
                                             
                                              Mortgage Advice During/After Divorce;

    The following information is meant to explain the process of obtaining a new mortgage during or after a divorce. It can serve as a reference but keep in mind that each situation and mortgage lender is different. I strongly recommend working with an experienced mortgage professional that can simplify and explain the process for you. A good mortgage professional should be able to set reasonable expectations and provide you with honest and productive guidance.
Typically, couples in divorce have three options in regards to their property and mortgage. The options are listed below with a brief informative description and advice.
1.      Sell the Property;
    This may, or may not be a solution for you to divide the equity in your home. Obviously, this is a matter to be agreed upon, and worked out between you and the attorneys involved.  In some states, Courts will not allow a property to be sold other than during specific times.  In some other locations, the market may have been too hard-hit for a sale to yield enough proceeds, at least at this time.  Often, it is agreed that one spouse will stay in the home. If so, you have to work out a plan in regards to the mortgage if both of you are on the mortgage note.

2.      Refinance – and Remove Your Spouse from the Loan;
      If you plan to split up the equity in the property, one option to do that is to refinance and get cash for your spouse through a new loan. However, due to declined property values and stricter lender guidelines this option ought to be explored in depth before starting the application process. You should discuss it with a mortgage professional that can evaluate your chances to qualify for a cash out loan. Refinancing (with or without taking cash out of your equity) is the most common way to remove one’s liability from the mortgage note during/after divorce. This way, the spouse who moved out and relinquished ownership to the property is safe in the event of a future default on the mortgage. He/she can also purchase a new property for themselves (provided that his/her income is enough to qualify for a new loan), as they will no longer be obligated on the prior loan.  As part of this process, it is recommended that this spouse also sign a deed (sometimes called an Interspousal Transfer Deed) to release any rights to the property.  The Interspousal Transfer deed is an easy way to transfer property from one spouse to the other and change it from community property to separate property. It also is without tax consequence, so there is no additional tax basis in your home as a result of the transfer.  It is important to know however that signing a deed, even an Interspousal Transfer will not release you from your liability towards the bank if you are still on the mortgage note. The bank has a right to, and will go after both persons on the loan regardless of whether there is a change in ownership if one borrower defaults on it.  Also, it makes no difference which one of you moves out of the house, you are both responsible for the mortgage payments if both of you stay on the mortgage note. In short, both of your credit scores will get hurt in this case. So, the best option here is to refinance to remove whoever is to relinquish ownership in the property from the loan.
In terms of the actual loan application process, you will have to provide a final divorce decree or a judge approved separation agreement to get the process started. It is the only way for a lender to determine your new income and debt situation. Remember, credit reports only list your debt, not income.  Lenders consider support payments a valid source of income IF your divorce decree lists that they are to last for at least three years and you can prove that the support payments have been made on time for the last six to twelve months.  If your ex has missed some payments the lender might not count the support income. Most likely, your lender will ask you to document the payments by providing bank statements or cancelled checks. Typically, lenders require the final divorce decree before issuing a final loan approval.

3.      Mortgage Assumption or Release of Liability;
       A mortgage assumption relieves one spouse from the liability on a mortgage without a refinance.  A mortgage assumption is certainly the most convenient option to remove someone from the mortgage.  However, not many mortgages are assumable and lenders are typically unwilling to agree to a mortgage assumption.  A release of liability is another option to remove one person from the mortgage note. You would have to submit a request to your current lender for them to do so. However, just like with a mortgage assumption, lenders rarely agree to a release of liability for a borrower, making a refinance the more practicable option.

Article written by;
Michael Hallin
Sr. Loan Officer
Bank of Manhattan
11835 W. Olympic Blvd, Suite 375
Los Angeles, CA 90064
Direct: 310 622 1145
Cell Ph. 323 397 2374
Email: mhallin@bankmanhattan.com

7 comments:

  1. Make sure any decisions about any mortgages are agreed in writing.

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