CREDIT PROBLEMS CREATED BY DIVORCE, or the Divorce Attorneys.

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

CREDIT PROBLEMS CREATED BY DIVORCE ATTORNEYS.

From the perspective of a real estate agent.

George Souto offers good advice about the matter of home mortgages and how they are treated in divorce.  See:  Protect Your Credit During A Divorce.  Over the years, this problem has surfaced in connection with prospective home buyers.  I've seen this first hand.  A prospective home buyer will inquire about buying a home and when asked about their credit, they mention that there is still a mortgage loan on their credit report for a home they owned either jointly or as TBE with a former spouse.  The mortgage has not been refinanced out of the caller's name and both are still equally responsible for the payment.  The explanation is always, "It was agreed to in the Separation Agreement".  All I couJudgeld think was, "Good Grief, don't divorce attorneys know anything about deeds of trust"  They are gong to stay on a credit report until paid off. 

"But, my attorney didn't tell me that I was still responsible".  THAT IS THE BASIC PROBLEM. 

Often, if the spouse that kept possession of the property has defaulted, the default and even a foreclosure is reported on the credit report of both parties, including the prospective home buyer. 

When a couple decides to divorce and hire divorce attorneys, one of the first steps is a SEPARATION AGREEMENT. In the Separation Agreement is an agreement between the parties about who will pay what.  One of the areas of agreement is often who pays the mortgage payment.  When the parties agree in the Separation Agreement that one party or the other will be responsible for the mortgage payment, that is an invitation to disaster.  The mortgage company doesn't care what the judge decrees.  The mortgage company just knows that they have two names on the home loan account and they expect payment.  THE MORTGAGE COMPANY IS NOT A PARTY TO THE SEPARATION AGREEMENT.   The parties can agree to any division of payment they wish in the Separation Agreement and the judge can incorporate the Separation Agreement into the Decree of Divorce.  However, if both the husband and wife are on the home loan, the debt is still recorded on the credit report of both the husband and the wife.  Since the mortgage company has not agreed to have only one party responsible for the mortgage payment, both husband and wife remain responsible. 

THE BIG PROBLEM is that, although the prospective home buyer is qualified, based on income, to buy a home, they do NOT qualify when the DTI ratio includes the mortgage payment on the home they jointly own with a former spouse.  Often the former spouse still lives in the home, makes the payments and will continue to do so.  MAKES NO DIFFERENCE.  As long as the mortgage payment is on that prospective buyer's credit report, unless they have sufficient income to qualify with TWO MORTGAGE PAYMENTS they are not gong to qualify.

Over the years, we've had several buyers that do qualify, even with two mortgage payments in the DTI ratio.

1.  The buyer will adjust their purchase price down so that they can qualify for both payments.  They won't buy the SFH, they buy a townhome at a much lower price.

2.  The former spouse sells the home and it's removed from the prospective buyer's credit report.

3.  The former buyer refinces the home into their name only and the loan is removed from the prospective  buyer's credit report.

A few years ago, we had one mortgage company approve a loan for a buyer whose spouse documented that she had made the payments timely for 2 years, had sufficient income to make the payments.  Of course, part of the income from which the payments were made was from court ordered and payroll deducted child support, which would continue for more than 3 years.  This former spouse was cooperative.  Many are not.

That case was about 4 years ago.  I doubt that it would be approved today. 

Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.  Serving home buyers in Loudoun County, VA.

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Rainmaker
843,857
David Popoff
DMK Real Estate - Darien, CT
RealtorĀ®,SRS, Green ~ Fairfield County, Ct
Something to be aware of, always best to get pre approved .
Apr 17, 2013 08:34 PM #1
Rainmaker
4,432,467
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Thank you for the post. I hope there will be a way to resolve this problem by getting the mortgage company to check the credit and income of the spouse who agree to pay the mortgage and have the mortgage in just that person's name .

Apr 17, 2013 08:35 PM #2
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
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David.  Thanks.  When we speak with buyers, it's good to ask a few questions.  Be prepared.

Gita.  There is a way.  The owners refinance into the spouse's name. 

Apr 17, 2013 08:37 PM #3
Rainmaker
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Roger D. Mucci
Shaken...with a Twist 216.633.2092 - Euclid, OH
Lets shake things up at your home today!

We would run into the same issue with lease agreements when couples seperated.  Most of the time they qualified jointly, so removing the other parties name from the lease was impossible because of the DTI ratio of the remaining party.

Apr 17, 2013 09:01 PM #4
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
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Roger.  I'm sure it's a problem for lease agreements too.  Folks just don't understand these matters.

Apr 17, 2013 09:06 PM #5
Rainmaker
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Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Yes, great post Lenn, happens all the time.

Apr 17, 2013 09:09 PM #6
Rainmaker
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Gary L. Waters Broker Associate, Bucci Realty
Bucci Realty, Inc. - Melbourne, FL
Fifteen Years Experience in Brevard County

There should be one rule for divorce planning...get rid of the house then the spouse!

Apr 17, 2013 09:10 PM #7
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Gabe.  Indeed.  Sadly, this is a totally avoidable problem.  This is where the divorce attorneys fail totally.

Gary.  Yep.  Why don't the divorce attorneys give that advice?  HA!

Apr 17, 2013 09:27 PM #8
Rainmaker
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Pat & Steve Pribisko
Keller Williams Greater Cleveland West - Westlake, OH

It's also hard to be the Sellers' Agent in a divorce situation, where the Sellers' agent is in between the parties who are trying to sell the "Marital Home."

Apr 17, 2013 11:26 PM #9
Rainmaker
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Randy Mitchelson,APR
iPartnerMedia.com #goipm & Homeland Heroes Home Loans - Bonita Springs, FL
First Impressions are made at First Click

This is great advice and with divorce rates in the U.S. so high, it affects millions of people. I too am amazed at how credit illiterate divorce attorneys are when advising their clients. They have a responsibility to represent their client to the utmost and by neglecting the credit report impact of a divorce, the attorney is doing their client wrong in my opinion. 

Apr 17, 2013 11:34 PM #10
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
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Pat and Steve.  Indeed.  Although if the divorce get to litigation and not mutual agreement and the judge says the home will be sold and dictates how the proceeds will be divided, being a seller's agent is not so bad. 

Randy.  I agree completely.  I've seen the damage that can be done with bad separation agreements.

 

Apr 18, 2013 03:41 AM #11
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Lenn I have spent more time than I can remember trying to explain to a Borrower that they can not qualify for a new property because of either credit issues created by the divorce or the DTI is high.  It would seem a simple solution for the spouse that is keeping the house to refinance the other off of the mortgage, but many times the DTI is to high for them to qualify to refinance the existing mortgage.  It can be a catch 22, and needs to be address early and not later.

Apr 18, 2013 09:12 AM #12
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
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George.  Absolutely.  I've spoken with many buyers who are in that condition. 

I hold the divorce attorneys responsible for this mess.  They're doing these NO CONTEST divorces and doing as little work as possible.  Fact is, if the couple KNEW what they were getting into, they might not divorce.  HA!

Apr 18, 2013 09:28 AM #13
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Debbie Reynolds
Platinum Properties - Clarksville, TN
Your Dedicated Clarksville TN Real Estate Agent

Lenn, It gets messed up when the attorneys get involved. If they would just contact us first, we could give them some assistance that would help the couple with getting back on their feet sooner.

Apr 18, 2013 10:49 AM #14
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
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Debbie.  IMO, this is gross malpractice by attorneys.  By incorporating a Separation Agreement into the divorce decree, they give the joint or TBE owners a false impression that the divorce agreement supercedes the deed of trust.  HA!

Apr 18, 2013 08:40 PM #15
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