When splitting assets during divorce, the conversation will likely focus on the largest one: the home. Typically, questions such as “What will we do with the home? Who gets to keep the house?” and “Where will the children live?” arise. After making these critical decisions, the next topic you’ll tackle is the mortgage. Sometimes a tricky and complex subject, handling the mortgage can become a stressful and confusing process. Most people going through a divorce have multiple questions about managing their mortgages, whether refinancing, selling the house, assuming it from your spouse, or purchasing a new home.
To answer some of the most pressing inquiries regarding mortgages during a divorce, DivorceForce spoke with Divorce Mortgage Advisors Founder Ross A. Garcia. He currently serves as managing partner and broker at PREI Capital Group, DBA Divorce Mortgage Advisors—which specializes in divorce lending—and is the cofounder of Survive Divorce, a free, online educational resource to assist those undergoing this emotional and often confusing process.
Here is our interview:
DF: Why is it best to engage a mortgage professional that specializes in divorce? What are the advantages?
Generally, a mortgage professional that specializes in divorce, such as Divorce Mortgage Advisors, has a great understanding of all divorce-related lender guidelines. Garcia’s main goal is to ensure the client is in the best position when the loan is submitted, giving them the highest chance of success.
“We're able to identify red flags or landmines early on,” states Garcia. “Whereas, a broker that doesn't specialize in divorce might not be able to identify issues, opportunities, or loopholes the way that somebody that specializes in divorce financing would.”
DF: What is the biggest misconception about mortgage and divorce?
Garcia explains the biggest misconception divorcing couples often have is about the title. Many believe transferring or removing one spouse’s name from the title eliminates their obligations regarding the house.
“That's incorrect,” says Garcia. “Transferring the title of the house does not address the mortgage. There are two separate issues that need to be addressed: the asset, being the house, and the debt, being the mortgage.”
The title is the simple part. All you have to do is sign over the deed and file it with your county. Removing a spouse’s name from the mortgage is where it gets a bit more complex.
DF: When is the best time to take your name off the mortgage if your partner is taking the house?
It depends on your partner’s ability to to qualify. According to Garcia, some clients are in a better position to refinance pre-divorce settlement, while others need to wait until their divorce is final. For instance, it would be easier for your partner to refinance and take your name off the mortgage once they’ve proven spousal or child support income. On the flip side, if your partner retaining the home is the child support payor, that obligation would preclude them from being able to qualify for a loan. Garcia explains their strategy would be to refinance pre-settlement before they begin paying child or spousal support.
If your partner is using incoming alimony or child support to qualify for a mortgage, the lenders will want to see they’ve received the support payments on time and in full for six consecutive months before they’re eligible. They also require a minimum of three remaining years on the support award. This applies to refinancing a home or purchasing a new one.
DF: How does Partner A get the Partner B’s name off the mortgage if Partner A is keeping the house?
Typically, removing a partner’s name off the current mortgage without changing its terms or refinancing is considered assuming the mortgage. Although most people look at this as Plan A, assuming a mortgage is typically challenging. Most loans aren’t assumable, so they must refinance or pay off the mortgage, explains Garcia.
However, if your mortgage is assumable, both partners should undergo an assessment to determine if they qualify before Partner A agrees to keep the house and remove Partner B’s name. Couples going through divorce should engage a mortgage professional prior to beginning or finalizing the divorce settlement.
“Then, we don't have the ability to get creative and structure the settlement around what their goals are for the house,” says Garcia. “The big takeaway is getting somebody involved early on, because at that point, you still have the ability to, you know, manipulate your settlement agreement in a way that would help you achieve whatever it is you want to achieve.”
DF: What is a quitclaim deed and when should you get one during a divorce?
Divorce Mortgage Advisors defines a quitclaim deed as the necessary paperwork to “remove the out-spouse (or departing spouse) from the title to the property, effectively relinquishing their equity or ownership in the home. The execution of a quitclaim deed is typically a requirement of a divorce settlement in order to complete the division of assets.”
Garcia states his company typically refers to quitclaim deeds as interspousal transfer deeds, essentially a transfer of the title. Before transferring the title, you’ll want to know the likelihood of your name coming off the mortgage, too.
“If you transfer title to your spouse and your name doesn’t come off the mortgage, you're joining on a mortgage for the foreseeable future with your ex spouse on a property that you don't have any ownership of,” he explains.
DF: Do we have to tell the mortgage holder that we are separating?
According to Garcia, there are three questions on the application that signal you’re getting a divorce. One of these is: Are you married, unmarried or separated? By separated, the document is referring to legal separation. So, if a couple is still legally married, a settlement agreement hasn’t been reached, and no child or alimony payments have been made, the lender does not need to be made aware of the divorce. If you do happen to disclose this information to them, but don’t have an agreement in place, it’s a non-issue.
DF: What are the risks involved in co-owning the home?
Staying on the mortgage should not impact your ability to purchase a new home, as long as the settlement agreement awards the property to the in-spouse. However, if you decide to co-own the marital home with your ex, consider the major risk involved: If the in-spouse were to ever miss a mortgage payment, it would impact both the out- and in-spouse’s credit, equally. According to Garcia, most settlement agreements allow the out-spouse to make a payment on this missed bill so it doesn’t impact their credit rating, but look for reimbursement from the in-spouse later.
DF: Should you purchase a new home during a divorce?
The answer depends on your ability to qualify for a loan. Typically, spouses don’t have the ability to qualify for a new home after a divorce. However, it may be a feasible option prior to the dissolution or with the help of their ex. In some cases, Garcia explains, both spouses will be listed on the loan for the new home, meaning they have a joint mortgage on both properties, but they split the titles accordingly, as part of the settlement.
DF: How can you set yourself up for financial success to purchase a home after divorce?
Garcia provides two tips for setting yourself up for financial success to purchase a home after divorce:
- Get assessed early on. Engage a mortgage professional prior to getting a divorce or early in the process. Put all of your financial information on the table, your current situation, and your expectations post-settlement. Having an expert involved early on can help you plan accordingly for the future you want, and set you up for success.
- Pay off debt and clean up your credit. If you can get your credit score up and get rid of any debt, you’ll set yourself up to qualify. Also, begin saving for a down payment if you can. Larger down payments will optimize your interest rate and cash flow, moving forward.
Top 3 Tips for Those Recently Divorced & Looking to Refinance Their Mortgage to Buy Out Their Spouse
Garcia provides his top three tips for refinancing your mortgage to buyout your spouse:
- Engage a professional. It’s always best to begin early. There’s no cost or harm in getting your situation assessed at the beginning of the divorce process. It should only provide peace of mind.
- Know your equity. It’s important you understand the amount of equity you have in your home, which can be determined by getting an appraisal. If you don't know the amount of equity, then you won't know the size of the loan you'll need.
- Stay employed. Many view the divorce process as a time of transition and transformation. Although you may feel like your life needs to take a new direction and you need a new career, stay where you are for now. Quitting your job or switching to a new field could have a detrimental effect on your chances of getting a loan.
Gregory C. Frank is the CEO and Founder of DivorceForce.