The #1 Concern of Divorcing Clients When Their Name
Remains On The Current Mortgage
One of the main concerns when one party is retaining the marital home in a divorce situation is that the vacating spouse will not be able to qualify for future mortgage financing while their name remains on the current mortgage. While many investors have their own guidelines or ‘overlays’ to Fannie Mae underwriting guidelines, a divorce mortgage professional will know how to handle a Court-Ordered Assignment of Debt.
When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender is not required to count this contingent liability as part of the borrower’s recurring monthly debt obligations.
The lender is not required to evaluate the payment history for the assigned debt after the effective date of the assignment. The lender cannot disregard the borrower’s payment history for the debt before its assignment. This applies to all contingent liabilities including mortgages, auto loans, credit cards, etc. (FM Selling Guide B3-6-05).
Freddie Mac has its own guidelines – the spouse NOT ordered to pay the debt must be removed from title in order to remove the liability from mortgage qualification. Depending on the debt in consideration – this could have an effect any tax planning such as keeping one spouse on title to the marital home to help with potential capital gain on a future sale.
It’s important that divorcing clients understand the impact of the distribution of debt during a divorce as it relates to their contractual obligation to the creditor. Even though the divorce settlement agreement states that one spouse is responsible for making the mortgage payment; car payment, or credit card payment the other spouse is not relinquished of their obligation should the responsible spouse not make the appropriate payments.
The distribution of debt whether joint or not through the divorce settlement agreement does however have an impact for qualifying purposes in regards to mortgage financing. For example, Jeff and Annette are both on their current mortgage loan and Annette is not only retaining the marital home but accepts the responsibility for making the mortgage payment including taxes and insurance. Because the divorce settlement agreement specifically states the mortgage payment is Annette’s responsibility, for mortgage qualification purposes the existing mortgage payment is not considered as a liability for Jeff when he is applying for a mortgage on his new home. The same applies for car payments and any other liabilities distributed in the divorce settlement agreement. It is important for Jeff to remember though that at any time Annette defaults or misses a mortgage payment it will have an adverse effect on his credit file because he is still obligated for the mortgage with the bank and the divorce settlement agreement has no bearing on his direct obligation for repaying the debt.
Many people assume that by filing a quit claim deed removing themselves from title that they are no longer responsible for the mortgage. A quit claim eliminates their name from the title of the property, not the mortgage.
Unfortunately for many, divorce is a time of great financial hardship and credit challenges. Because you are obligated on the mortgage until it is paid in full, it is imperative that the person responsible for the payment remains current.
I am a Certified Divorce Lending Professional (CDLP) and truly have a passion for setting divorcing clients up for success post divorce. Working with divorcing clients is not your typical real estate or mortgage transaction. If I can be of help to you and your divorcing clients, please don't hesitate to reach out to me!
Make it a GREAT day!
Jody
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