Here are some great & common factoids when you own own real estate and need new mortgage financing as part of the divorce settlement.
Question: The ability to use the receipt of alimony /maintenance as qualified income for obtaining mortgage financing requires the ability to show the income is consistent and stable. In order to document this income is stable and consistent, how many months of documented receipt is required?
Answer: You must be able to document the receipt of sox (6) months of alimony or maintenance payments along with documentation to support the income will continue for at least three (3) years for conventional financing.
Key Tip: If receipt may be documented for the required six (6) months and will continue for three (3) years, but payments are not made and consistently and timely, the income may not meet the stability requirement for mortgage underwriting guidelines. ALWAYS make support payments timely and consistently every month in order to avoid any issue with your loan approval.
Question: It is not an uncommon thing to have cash buyers in the real estate market these days. Paying cash is being used as an incentive for sellers to accept an offer due to a lack of inventory in many markets or to avoid many of the mortgage underwriting guidelines in a divorce situation. The key question for cash buyers in any situation needs to be: “What is your intent for replenishing your cash reserves?” If the intent is to take a mortgage out in the future, how many days does the cash buyer have to apply for a mortgage in order to avoid the potential loss of the mortgage interest deduction?
Answer: You must apply for a mortgage within 90 days of purchase in order for the IRS to consider the new debt as acquisition indebtedness. Otherwise, the new debt will be considered home equity indebtedness and the mortgage interest may not be tax deductible.
Key Tip: Recent tax reform has significantly changed the mortgage interest deduction. The acquisition indebtedness limit was reduced from $1,000,000 to $750,000 and the home equity indebtedness deduction has been removed until 2025!
Question: Refinancing the marital home in a divorce situation is typically required in order to remove one spouse from the mortgage and to pay the other spouse their share of equity in the property. The number one mortgage lender error when working with divorcing clients is to assume the new mortgage is a “cash out” mortgage which carries higher interest rates and limits access to the property equity. In order for the borrowing spouse to qualify for a standard non-cash out refinance, how many months does the borrowing spouse need to be on title to the subject property?
Answer: The borrowing spouse must currently be on title to the marital property for at least twelve (12) months prior to the mortgage loan application in order for the new mortgage to be considered a non-cash out mortgage. If the borrowing spouse has been on title for less than the required time, the new mortgage must be considered as a cash out refinance and will limit the new loan to value of the home at 80%. If the current mortgage on the property is 75% of the value, the borrowing spouse may only take an additional 5% equity out of the property in a cash out scenario. If the vacating spouse was to receive 15% of the remaining equity in the property, the borrowing spouse would be short on the equity buyout by 10%.
Key Tip: Every mortgage application for a divorcing client has many turns and unique situations. Working with a Certified Divorce Lending Professional (CDLP) during the settlement process will help you avoid many pitfalls and mistakes commonly made in the mortgage process. A CDLP can help you set you up for success and make obtaining the new mortgage easier and avoid many commonly made mistakes.
By: Jim Bakhtiar, CMPS, CDLP
