The New Realities: Your House and Divorce – Can You Refinance?

A lot has changed in a year’s time.  The old rules for financing and refinancing a house are very different than they were during the real estate boom.  So when couples are figuring on how to split assets, they will need to ensure that the spouse who takes the house can actually obtain a mortgage.

The downturn in the real estate market is one big reason.   Homes are often worth less than the price that they were originally purchased, leaving the buyers “underwater” or owing additional funds upon the sale of their house or any refinance.  Appraisals, too, have changed.   Most mortgage lenders do not get to choose their appraisers any longer – but must have an “arms length” relationship.  Appraisers often need two comparables in the neighborhood, two listings under contract, and will include any neighborhood foreclosures in the price.  Furthermore, appraisals are only good for a certain length of time before they must be redone to make sure the price is still accurate.  Lenders really don’t care how nice your house is – only that the value is accurate.

The mortgage scene is also much different.  For one thing, lenders are taking a much closer look at an applicant’s finances.  People with assets but no income need not apply.  So this may eliminate spouses who have received a settlement of cash or other assets, but who have no income, or who are just getting back into the work force.   Lenders also want to see a history of the applicant receiving child or spousal support – some for 3 months, others for 6 months (if the applicant is using support as income for the loan).  And some lenders want to see at least 3 years of child support written in the settlement agreement.  Most lenders will not want to issue a mortgage for a house payment of more than about 28% of the applicant’s income.  They do not want the mortgage to be more than 36% of gross monthly income.  Additionally, credit scores must be good, and most lenders will want a credit score of 720.  Lenders are asking for 10% down for a conventional property, 20% for a vacation property, and 25% for investment property.  VA and FHA loans have different requirements, but some of those can be fairly tough.  Lenders are often treating the “deed in lieu of foreclosure” and short sells as regular foreclosures.  Thus, people having gone through such home “give-backs” may find themselves unable to refinance or receive a mortgage until more time has passed.

Be aware that it is also taking longer to close loans.  The paperwork and disclosures have become more onerous, and so a closing generally cannot be done in less than 30 days.  Many lenders laid off a number of employees last year, so your refinance or mortgage may move more slowly than expected.

What does this mean to divorcing couples?  Some may not be able to refinance their homes because of a low house appraisal.  Others may not be able to refinance at all on their credit, salary, work history, or for other reasons

If a divorcing couple cannot sell the house and cannot refinance the house in one person’s name, there are few options.  Live apart and wait until the housing market comes back?  Have the spouse receiving the homework on their credit and income?  Before any paperwork is signed, it would be advisable for one or both parties to consult a mortgage broker to determine each person’s ability to obtain a mortgage or refinance.  Moreover, they would be advised to consider the worst case scenarios of their proposed settlement and plan for these should they occur.

This entry was posted on August 25, 2009 at 6:59 pm and is filed under General Divorce Issues, Money and Divorce. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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