When I first meet with a new client at my office in Hackensack, New Jersey, I ask them to describe their goals for their divorce. Most often, the marital residence is brought up as the number one goal. People tell me that they want to retain ownership of the marital residence, or they want to buy a new home with their share of equitable distribution immediately after the divorce is finalized. In many divorces, the marital residence is the single biggest asset, and often the one that causes the most friction between litigants, especially if children are involved.
Most frequently, clients ask me how they can retain ownership of the home in connection with their divorce, or how to purchase a new home after the divorce is entered. I advise my clients to make sure they are making a wise financial decision, and be sure they are not basing their decision to keep the home based purely on emotional reasons. I also explain that there is a myriad of issues and answers involved in this assessment, which is different for each case: What is the appraised value of the home? Are they employed? Will they be employed? Can they afford to refinance the home? Can they afford to buy out their spouse? What is the time frame to do so? Will their spouse agree to postpone the sale? What will their alimony obligation be? How much child support and alimony will they receive? Do they have cash available for a down payment? Before the negotiations are completed, I always encourage my clients to consult with a mortgage specialist to review and discuss their options before an agreement is signed. Reviewing the various scenarios also enables my clients to be better prepared and avoid any surprises once the ink has dried on a settlement agreement.
There are numerous pitfalls and issues that can arise post-divorce when it comes to either refinancing the home to remove the former spouse as an obligor on the mortgage or securing a new mortgage by one spouse alone. Marc C. Demetriou, CLU, ChFC, Branch Manager and Mortgage Consultant at Residential Home Funding Corp. in Bloomingdale, New Jersey, is often consulted to provide guidance to litigants during this process. Mr. Demetriou advises, “After a divorce, there could be challenges applying for a mortgage. Most importantly is the number of months that most banks will require alimony to be received before they will count it towards total income. Most banks require 6 months of receipt but at times it is possible to get a mortgage approved with only 3 months of receipt and on a case by case basis less than 3 months of receipt.”
Demetriou further advises, “Divorcing couples sometimes have lower credit scores due to unpaid or late bills caused by the anxiety and stress of the divorce. If one person moves out, sometimes the bills they were responsible for previously are not forwarded timely to a new address or are ignored. This will affect credit scores. Most banks have minimum credit scores required to qualify for a mortgage, there are options for credit scores with a minimum of 580. Also a big factor, sometimes there is simply not enough income to qualify for a mortgage. When this occurs, we look for a co-signor to help support the debt to income ratio and allow for a mortgage approval and look to pay off existing debt if ample assets exist.”
In addition to available income and credit score issues, lenders can consider the parameters involving new employment after a divorce. On this subject, Demetriou stated, “For example, if one person was unemployed, and now has a 100% commission-based job, or a part-time job, such income cannot be used to qualify for a mortgage. Commission, part-time income and even bonuses generally need to be recorded on two years of tax returns to show consistency and actual income. A divorce can affect every item reviewed by the underwriters to approve a mortgage: income, assets, credit and debt to income ratio.”
I encourage my clients who are desirous of retaining the marital residence, by way of buy out and refinance, and, similarly, I advise my clients who wish to purchase a new home as soon as the divorce is entered, that it is important to know what will be taken into consideration by the various lending agencies so ample preparation occurs to try to achieve each party’s goals as it pertains to the home.
“Navigating through the process takes a true understanding of all lending guidelines, programs and products available in the marketplace to assure an approval on a mortgage,” Demetriou said.
I also motivate my clients to assess the pros and cons of taking on a mortgage so soon after a divorce….and I remind them it is much harder to divorce the house than the spouse!