In most divorce cases, the parties own a house and have a mortgage. Refinance becomes a crucial consideration during this period. Some couples see dissolution as an opportunity to downsize their dwellings, but it is more common for one or both parties to wish to keep the home, even if it is just “for a while.”
Complications can arise in this situation. There is definitely room for one spouse to transfer their home interest. Yet, transfers of this type are still subject to the liens and encumbrances present. A promissory note secured by a mortgage was common when the parties acquired ownership of their home. In essence, a mortgage involves pledging the house as collateral for the money due on the promissory note.
As a joint and several obligation, the promissory note gives both borrowers the option of recouping the debt from either one or both. So, even though I no longer own my house, I am still obligated to pay the old mortgage if I transfer my interest in it to my spouse.
This is an issue that needs to be resolved. It is customary to have a property settlement agreement that states one of the spouses will “indemnify and hold harmless” the other spouse from the obligations of that promissory note. In the event that the spouse in the house stops paying, such a clause will not benefit the spouse living out of the house. As a result, lenders are wary of borrowers who come knocking on their door with an offer to purchase a new house while still owing money on the residence they left when seeking greener pastures. I can expect the sheriff to show up at my door when a lawsuit is filed if I have signed an agreement transferring my home to my ex but she does not pay the mortgage. As a defense to my lawsuit demanding payment on my now-former home, my stupid “indemnification and hold harmless clause” won’t work. Due to your later agreement with my wife, my old lender is not bound by it.
Refinancing the house is a clean solution to this dilemma. By refinancing, I actually terminate our mortgage and replace it with one that is in my spouse’s name only. In essence, the promissory note my spouse and I used to buy the property years ago has expired and the mortgage has been satisfied. My spouse now has clear title to the property (my transfer to her) but the note and mortgage are in her name only. In the event that she doesn’t pay that new loan, I don’t have to worry about any lawsuits since I am not on the note.
According to Ken Fineman, a mortgage broker with CrossCountry Mortgage, the refinance business can be troublesome. Borrowers often believe a refinance is easy if the property has substantial equity (market value less mortgage debt), but lenders do not profit from foreclosures. Loaning money to people who pay their debts on time is how they make their money. Refinancing with home equity can be advantageous, but the real keys are a good credit score (paid bills on time) and regular income.
These two elements were discussed by Fineman after he noted that every lender has a different set of lending criteria for deciding who and how much to lend. Refinancing a divorced couple’s home is usually stymied by the income history of the spouse who purchased the home. The type of loan sought by the borrower can also play a role in this. The loan requirements for FHA loans are fewer, but the interest rate is higher. The opposite is true for non-FHA loans. It’s possible to credit child support and alimony as income when refinancing your mortgage, but the lender will want proof that you are paying the support/alimony obligation for 3-6 months.
In his experience, the sooner a mortgage broker is contacted in divorce finance transactions, the easier the process can be. The mortgage broker serves as the “guide” for borrowers to navigate the murky waters of mortgage underwriting. Some of the time, he referred potential clients to credit experts who can help them clear their bad credit histories and improve credit scores. It is common for potential clients to come to him too late in the divorce process. In many cases, applicants do not offer agreements or payment histories or have credit histories that could have been repaired but were not.
When a divorce takes place, it is usually fairly evident whether one party wants the house and whether that desire is achievable. In this seminar, we learned that even if the total settlement terms have not been resolved, even once retaining the home becomes clear, it might be time to find a mortgage broker or lender. A person who understands which information would be important to mortgage underwriters would be in charge of establishing support payment histories and cleansing credit scores. Unless the refinance is carefully described in the property settlement agreement, there is a risk of the refinance not being accepted by potential lenders. It is worth noting that few lenders will go to settlement until all the terms of the property settlement are concluded and presented to the refinance lender for review. Despite the advice to never let the cart go before the horse, this is one instance when parties should consult with their lenders to determine whether the horse will be able to pull the cart based on their credit and income histories.
If you need help navigating your way through a home transfer in your divorce it is best of your concern to hire a professional divorce attorney with over 50 years of experience in this industry.
