Qualifying for a Mortgage Post-Divorce
In California, as well as in other states, the marital home is often one of the most contentious assets that is divided in the divorce process. While one spouse may want to keep the home, they may not be able to qualify for a refinancing of the mortgage, especially with the current interest rates over double the rates that has been artificially suppressed since the Great Financial Crisis of 2008.
Options outside of refinancing include 1) mortgage assumptions as many lenders are now allowing assumption of current mortgages and 2) the possibility of keeping the ex-spouse on the mortgage along with indemnifying them from any liabilities and obligations post-divorce.
However, for those cases where these options are infeasible, refinancing may be the only alternative. This is a huge issue if the spouse who needs to refinance is not able to qualify without counting income from support.
It is important to know that the use of spousal support and/or child support to qualify for the mortgage is beset with many nuances. Underwriters typically require a six-month history of support that is COURT-ORDERED to use the income from support in the qualification process. If the parties are in mediation or agree among themselves to voluntarily make the support payments (either temporary or permanent) for either spousal or child support, they need to know that this structure will not qualify the support for consideration as income.
Spousal and child support needs to need the following guidelines of “pattern and duration” to be considered as income to the refinancing spouse:
1. 6-month history of court-ordered support on a regular and timely basis prior to the date of the loan application on a conventional loan. If payments are irregular or have not been received for six months, they typically cannot qualify as income.
2. Support must be court-ordered to continue to be paid for a minimum of 36 months post the date of mortgage application for the refinance NOT 36 months post-settlement. This needs to be a verifiable predictability of those payments.
3. The support must be paid exactly as the court order is written without any deductions such as deducting add-on reimbursements due from the supported spouse from the amount of support paid
4. The support must deposited into the borrower’s separate account and be traceable
In addition, if the refinancing spouse has agreed to a lump sum support, this will NOT be considered as income for the borrowing spouse. Lenders would rather see 48 months of a predictable spousal/child support payment rather than a lump sum in the present.
One workaround to the lump sum payment would be if the lump sum amount funds a trust in which the recipient is not the grantor. The payor of the support should be grantor of the trust under new rules recently passed prohibiting the recipient to establish the trust.
If placed in trust, the equal court-ordered distributions will qualify the lump sum support for consideration in the qualification of the borrower.
If not placed in such a trust, the lump support would be considered as a portion of the total assets the borrower has. Asset-based financing requires a significant amount of assets and a very high bar for the borrower to qualify based on assets alone.
While it is possible that the vacating spouse may be on the refinancing loan to help with the qualification of the other spouse, this is problematic in several ways. First, the parties remain legally entwined post-divorce which could cause problems as circumstances may change for the vacating spouse in the future.
Also, should the inhabiting spouse run into financial constraints and have late payments, missed payments or even a default, the vacating spouse will be affected at a minimum by a lowered credit rating that affects future loans but also would be on the hook for the mortgage obligation. The lenders will not consider that this spouse is not “obligated” because the spouse is named on the mortgage. These concerns also apply to those circumstances where the spouse remains on the current mortgage to avoid refinancing.
In California, any income over base earnings qualifies as income available to pay support. These bonuses, commissions, and RSU vesting amounts are subject to Ostler Smith percentages upon which support obligations for both spousal and child support is calculated. Because of the variable nature and non-guaranteed attribute of such income, however, this income cannot be used as income to qualify for support. Only fixed, base earnings, can be used, even though the RSUs vest according to a pre-determined vesting schedule.
The borrowing spouse also needs to show a six-month history on a job to use the income from that employment for qualifying. If a stay-at-home-parent is now re-entering the workforce, the salary job must be in the same field as previously employed, and a six-month history in the new job would be required as a minimum. If returning to an hourly job in the same industry prior to being a stay-at-home-parent, the borrower would need to demonstrate a two-year history of work in that position.
Negotiations for settlement purposes need to consider what will qualify a future borrower for a mortgage if solely owning the marital home or another home post-divorce. As the divorce process is initiated, there are many implications for mortgage qualifications and it is important to start the clock on the income that will need to be considered in any mortgage application.
Note: This article is for informational purposes only and is not intended to provide either tax or legal advice. Please contact your attorney or accountant and rely on their independent research and advice for these matters.
