Buying or Refinancing a Home Post-Divorce

December 22, 2016. By Jennifer Wolfsberg:

Divorce in our country has doubled over the last 20 years among people over the age of 50. For these individuals, it can be a tough challenge to restart a new life under very different income and asset base circumstances.  Many difficult decisions usually need to be made, such as those regarding the divorcees’ living situations and whether or not to maintain home ownership.  Some may wish to buyout his or her spouse’s share of the marital home, while others may wish to purchase a new home entirely.  While home ownership is an attractive thought, it can put unrealistic strain on personal finances over the long-term thereby affecting savings and liquidity needs.

In order to buy out an ex-spouse and have him or her removed from the existing mortgage, you will usually need to refinance the home. One way this can be achieved is by applying for a cash-out refinance loan (essentially a new mortgage with cash back) in which any equity built up in the home can be received as cash and used to pay the ex-spouse for his or her share of the value.  While this is procedurally sound, the decision should be not be made lightly.  Many divorcees get themselves into trouble by letting their emotions dictate rather than carefully considering the long-term financial consequences of trying to maintain the home, which is oftentimes larger than their present needs require.

For those divorced individuals searching for a new home, we have found that lenders’ qualifying requirements post-divorce continue to remain stringent.  For many individuals this is not taken into consideration when structuring their divorce agreement, and therefore find themselves locked out of any opportunity to qualify for the purchase.  For example, in the state of Massachusetts, in order to use alimony as income on your mortgage application, you must show that you will receive a steady amount for at least three years following the closing date[i] of the loan even if the amount prior to the three-year-mark is substantial.  As you can see, minor details can have serious effects. Throughout the divorce process, individuals should be open about their post-divorce goals with their Certified Divorce Financial Analyst, Financial Planner, and Divorce Attorney.

To address these common issues, we have prepared several questions that may aide you while structuring your agreement or that may assist in gaining a stronger understanding whether you will be viewed as a favorable candidate by a lender:

1. Does my alimony and child support count as income?
   • Yes, with certain restrictions. Here are the guidelines:
     • There must be a history of receipt in the most recent six months. If the payments are not in the full amount, or are not received on a consistent basis, the alimony or child support will not qualify as income.
     • The borrower must also be able to provide documentation that the payer is obligated to make payments for at least the next three years, starting on the note date.

2. How far back, and forward, will lenders look into my taxes and income?
   • The standard guidelines for income and tax returns is 2 years.  However, if one is receiving alimony and/or child support, the underwriter only needs to see the most recent 6 months of receipt for those funds, along with a copy of a divorce decree, or separation agreement if the divorce is not final, indicating the following:
     • That payment of alimony or child support is mandated;
     • The amount of the award;
     • The period of time over which it will be received.

3. What exactly will lenders look at when I am applying for a mortgage?
   • Underwriters will be looking for the following:
     • A copy of a divorce decree (or separation agreement if the divorce is not final) that indicates payment of alimony or child support and states the amount of the award and the period of time over which it will be received. Without this the lender will not consider any proposed or voluntary payments as income.
     • Any other type of written legal agreement or court decree describing the payment terms for the alimony or child support.
     • Documentation that verifies any applicable state law that mandates alimony, child support, or separate maintenance payments, which must specify the conditions under which the payments must be made.
     • Limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid. For child support income, proof of the ages of the children for which child support is received. Regarding continuance, as previously stated, the borrower must receive the payments for three years following the closing date.
     • Documentation of no less than six months of the borrower’s most recent regular receipt of the full alimony/support payment.
     • The underwriter will review the payment history to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.

4. Should I take out a home equity line of credit to buy my ex-spouse out of our marital home?
   • This is dependent on how much the buyout is and in turn how much equity one qualifies for. Typically, one would take out a mortgage versus an equity line to pay off their ex-spouse because the terms and payments are more favorable. With a true mortgage, the monthly mortgage payments contain both principal and interest, and will not change for a fixed period of time (30 years, etc)[ii].  With an equity line, one’s monthly payments vary month-to-month and are not fixed.  In addition, the minimum monthly payment contains interest only and one never pays down principal.
5. I can buy a home, but should I?
   • Buying a home is exciting yet comes with great financial responsibility. Our Director of Financial Planning, Olga Okaty, sees this often in mapping out purchases for clients:

Owning a home will come with a range of additional expenses beyond the monthly mortgage, escrow, and homeowner’s insurance payments. Some other expenses to factor into your budget include private mortgage insurance (if your down payment is less than 20% this will be required), utility bills (including electricity, heat, water, sewer, and trash disposal), ongoing maintenance and repairs (including unexpected surprises that you may uncover post-home inspection, or exciting remodeling projects you may envision as you settle into the space), as well as homeowner’s association or condo fees.  Smaller miscellaneous expenses such as a home security system, landscaping, and snow removal can also add up quickly and should be factored into your cash flow before you buy.  We work with many divorcees to structure a formal financial plan as a blueprint to see where a home purchase fits in with their other long-term goals.”

We welcome you to share this article if you know someone who is going through a divorce or navigating the waters of post-divorce home purchasing. Of course this is just an overview of considerations, however we work with many wonderful professionals and are happy to be a resource should you need further assistance.

Special thanks to Justin Tulman of Fairway Mortgage for his contributions and guidance in answering the questions in this piece.

[i] Mortgage brokers are able to file for exceptions with the lending banks, however these instances can be considered very rare.

[ii] Be sure to discuss fixed versus variable rate mortgages with your mortgage broker