MORTGAGE QUALIFYING HAS SOME NEW TWISTS AFTER DIVORCE
By Tracey Rumsey
Qualifying for a mortgage after you have been through a divorce makes the process more difficult. Being aware of this and passing on the useful tips below to your clients in this situation will make you an even more valuable real estate professional, and possibly help you avoid potential problems in the middle of your next deal.
Imagine the following scenario: Jill walks out of her lender’s office with the crash of her collapsing dream ringing in her ears. “I’m sorry, but you just don’t qualify for this home,” her loan officer had just informed her.
What happened? She has good credit. She’d done the math and could easily afford the payments. This was the perfect house for her and the kids, and now it was going to slip away. She didn’t realize it was the divorce that made her an undesirable loan candidate.
Jill’s situation is common, and it’s also avoidable. Divorce affects a mortgage loan application with a specific set of guidelines. The good news is that several things can be done before, during and after a divorce to keep your client’s borrowing ability intact.
BEFORE the first meeting with an attorney/mediator:
– Have your client get a copy of the joint credit report from all three bureaus (Equifax, TransUnion and Experian) at the FCC approved Web site annualcreditreport.com. These will be separate reports from each bureau. Your client can get a combined report from a fee-based site such as creditreport.com.
– The client needs to list all debts, account numbers and the asset secured by the debt, if applicable.
DURING the divorce process:
– Advise your client to carefully review the way debt division is written in the decree. Vague language such as, “Petitioner is responsible for the following indebtedness: her Visa, her Citibank and her Wells Fargo accounts,” creates havoc when someone has two Visa cards, three Citibank cards and two loans with Wells Fargo, all of them joint. The client understands which accounts are being referred to, but an under writer won’t. Be sure to inform your client to clarify.
– Explain the notion that even though they are getting divorced, their credit can still be married. Joint debt activity is reported on both of their credit reports until the debt is paid off and the account is closed, or refinanced into one name. This is bad news for the non-responsible party if late payments occur. The damage to that person’s credit score could cost him or her a loan approval; ugly but true. If possible, advise eliminating joint debt.
– Suggest your client monitor joint accounts by agreeing on access until everything is paid off, closed or refinanced. Internet access is convenient, but not always possible. It is possible to inform creditors without Web sites of the situation and request both parties be notified in case of delinquency. Better your client cough up the payment on an account that the ex can’t pay this month, rather than risk finding out later that his/her credit score is trashed.
– Remind your client when listing children to include birth dates. This will save your client the hassle of providing birth certificates at loan application time. Age determination is important, as guidelines allow child support income to be included only when it will continue for the next three years. In most cases, this is until the child turns 18 or graduates from high school, whichever happens last.
– Is your client trying to qualify and close on a home during the divorce? Most lenders will require a legal separation agreement, especially if there are minor children involved. Lenders want something from the courts to get an accurate picture of potential debt division, alimony and child support payments. If your client is planning on using income awarded in the agreement, then he/she must provide a well documented history of receiving the income for a period of three to 12 months, depending on the lender’s requirement. If this is not possible, then your client might be out of luck.
AFTER the divorce:
– Make sure both parties have copies of tax returns for the last three years and copies of the signed divorce decree and any other important documents (bankruptcies, birth certificates, account statements, etc.).
– Stress the importance of creating a paper trail of alimony and child support income if they plan on using it to qualify. Payments made to your client by cash or check should be deposited in his/her bank account. Your client should not “hold back” money from the deposit or pocket the cash. Instead, the client should deposit the entire amount and then withdraw funds afterward. Records from the Office of Recovery Services (ORS) can be used as well to document income.
– For those that pay alimony and child support, make them aware that a verbal agreement to decrease payments will not help decrease debt on a loan application. If changes are not documented through the court or ORS, the original payments declared in the decree will apply.
Like them or not, the rules above are the regulations and realities of mortgage lending that can further muddy the waters of divorce. Is there a way around the rules? Sure, by doing a different type of loan that doesn’t require proof of income. Just be sure to prepare your client for more stringent credit and down payment requirements along with higher interest rates. If borrowers want the best terms with low or no down payment requirements, they must know the rules and follow them. Divorce is difficult enough without getting caught in a technicality trap that could have been side stepped with a little planning and knowledge. Now, thanks to you, your clients know.
Tracey Rumsey is a loan officer, continuing education instructor and author of “Saving the Deal – How to Avoid Financing Fiascos and Other Real Estate Deal Killers,” (AMACOM, 2008). She can be reached at firstname.lastname@example.org, or visit traceyrumsey.com for more information.