Mortgage Refinancing for Divorce Situations
How do I refinance my mortgage after a divorce?
With the current decrease in the market values of homes across the country, dealing with homes and mortgages in divorce situations has become increasingly difficult. In the past, if two people could not agree on how to work out what would happen to the family home, a family court judge could simply order that the house be sold and the proceeds be split. In the current real estate market, selling the home may be extremely difficult so most people will have to look at a refinance mortgage. If the decision is made to keep the existing home for one spouse, both divorcing spouses need to take several important issues into account.
Protect your credit after divorce
The spouse that is leaving the marital home does not want to be obligated on that mortgage for two reasons. First, as long as you are still one of the borrowers on the mortgage, the mortgage credit history will appear on your credit report. So if your ex-spouse misses a mortgage payment, it affects your credit. In addition, as long as that mortgage is on your credit report, you will not be able to qualify for a new mortgage loan unless you can prove that your ex-spouse has been making the monthly payments for at least three months. The only proof is canceled checks, which are sometimes difficult to get from ex-spouses.
Only one way to get off a mortgage
There is one way for a spouse to get off of a mortgage debt when divorcing. Called a "novation," this process requires that the spouse who is keeping the house submit a complete application package to the lender who has the loan. Borrowers requesting a novation must qualify on their own for the loan and if approved, the lender will remove the departing spouse.
Mortgage refinancing after divorce: factors to consider
Often, a novation will not work because not only does the spouse keeping the home need to get the other spouse off the mortgage, but they often also need to withdraw cash from the equity in the home to pay off the departing spouse. For cases where a borrower needs to provide cash to the departing spouse as part of the refinance, borrowers should look at the FHA program if there is less equity. The FHA program will allow borrowers to refinance up to 85% of the value of their home and take cash out, while regular programs only go up to 75%.
Another factor to consider when refinancing in a divorce situation is how long the spouse staying in the home expects to keep the property. In many cases, divorcing parents would like to keep their children in their family home until they reach 18 and head off for college. For these situations, borrowers should consider refinancing into a lower-rate 5/1 adjustable rate mortgage or choose an interest-only adjustable rate mortgage to keep payments low until that time. These lower payments help for a specific period of time for situations where alimony and child support might not be enough to cover the payments for a fully amortizing fixed-rate mortgage.
Mortgage refinancing after divorce: timing is Key
Finally, divorcing borrowers who need to refinance and who will receive alimony and child support over time will need to take into account a timing issue for refinancing. Borrowers can use alimony and child support income to qualify for a mortgage refinance, but only if they can show that they have been receiving that income for at least three months. Canceled checks are usually required to show that the payments have been made, but some underwriters will accept a copy of a bank statement showing receipt of the funds. If a borrower is looking to refinance as part of a divorce settlement and using alimony/child support income to qualify, it is important to make the settlement contingent upon receipt of the first three payments.
To get qualified for a refinance for your current divorce situation, complete a free rate quote request now for help from a loan officer experienced with divorce situations.
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