Graham Pruitt and the staff at MVB have many years’ experience in obtaining mortgage financing for separating and divorcing couples. At times, these sensitive situations require creative mortgage solutions. Below you will find frequently asked questions regarding issues addressed during the mortgage process that can be unique to separating couples. MVB was able to find creative solutions to these complicated financial circumstances for our separating clients.
A: It is possible for the staying spouse to refinance, even if they do not have sufficient income to qualify for a refinance. In these cases, the leaving spouse can stay on the mortgage as a “non-occupant co-borrower”, where the leaving spouse is on the mortgage but no longer resides at the marital home. This way the leaving spouse’s income can be used to qualify for a refinance. This can be especially helpful in cases where a six month history of support has not been established or the staying spouse is completing school with the intention of starting a career post-separation. The staying spouse can then refinance to remove the non-occupant co-borrower once they have sufficient income to qualify on their own.
A: The escrow refund that is received after the refinance of the marital home is often overlooked when planning for a refinance during a marital separation. The previous lender will send a check to the clients after that mortgage is paid off that contains the balance of the borrowers’ escrow account at the time of the refinance. However, the check will be made out to both spouses since the previous mortgage was in both the separating spouses’ names. It is important for the separating spouses and their attorneys to account for the escrow refund in the separation process and prior to closing on the refinance in order to avoid a point of contention between separating spouses.
A: When completing a refinance transaction, the borrower has what is called a “Right of Rescission.” This allows the borrower to change their mind and rescind their refinance application before receiving the funds from the lender. Because of this, the lender will not release the funds to the borrower until three days after settlement. This means the spouse being bought out will need to wait until Friday to receive their share of a refinance closing on Monday. Additionally, lenders require that the deed be signed by the leaving spouse before a refinance can be closed. The deed will be held by the settlement attorney and not be recorded until after the rescission period is completed and the funds have been released. So you can explain to your spouse that they have to sign the deed before they can receive the funds.
A: Lenders will not accept support payments that have been deposited into or sent from a joint (both spouses) bank account. This is because the lender cannot be sure that the support payments are going from one spouse to the other if the account the payment is deposited in has both spouses’ names. In this case, the lender will not count these support payments as income, which can hurt your chances of qualifying. The best way to ensure that support payments will be accepted by a lender is to have the payments coming from one spouse’s sole account and deposited into the other spouse’s sole account.
A: Unfortunately, lenders will not accept a Partial Separation Agreement. Even though the partial agreement might address the terms of the equity buyout, there are other factors that may not be addressed that the lender is concerned with – such as support (income or payments) and assuming debt. Generally, lenders are uncomfortable with any circumstances that might change after settlement, and a partial agreement will set off red flags. It is best to have a completed Separation Agreement before attempting to close on an equity buyout refinance.
A: You may be able to take the extra money out from your refinance without including it as part of the equity buyout. However, lenders will consider this a cash-out refinance, which is more difficult to qualify for and can lead to higher fees and rates.
There is a better alternative! Most lenders consider equity buyouts that are spelled out in separation agreements as no-cash-out refinances – which means lower fees and rates than a cash-out refinance. Since you can calculate your equity buyout amount whichever way you please, it is easier to just include the extra amount owed to the leaving spouse as part of the buyout equation! This ensures that the refinance stays as affordable as possible, while still complying with the terms of the separation.
A: Yes, you both can refinance the marital home without a separation agreement. The leaving spouse would be considered a non-occupant co-borrower and their monthly rent expense would be counted as a liability. If you can qualify carrying the post-refinance mortgage payment and the leaving spouse’s rent expense then you will be able to refinance.
A: The short answer is yes. However, there are specific conditions that need to apply in order for you to use interest income from a joint account. Most importantly, the separation agreement needs to be very specific about the division of assets. You will only be allowed to use interest income from accounts that you will remain the owner of via the separation agreement. It is helpful if the agreement uses the following information to identify the account:
Additionally, you will need to be able to match the assets with interest income declared in your most recent Federal Tax Return. If you meet these conditions then we can use the interest income to qualify for a mortgage.
A: You can definitely get pre-qualified and put in a contract offer on a home without your spouse’s refinance and equity buyout being completed. As long as the refinance would be completed and you would receive the funds from the equity buyout before the settlement date on the contract then you can be conditionally pre-qualified subject to the completion of your spouse’s refinance.
As to whether the seller would accept the offer subject to the equity buyout being completed, we have seen many contracts accepted by sellers with that exact condition. It can be helpful to have a loan officer that is familiar with the equity buyout process and can accurately explain it to the seller’s realtor.
A: Using income from a new job can be tricky to navigate with a lender. If you have been continuously employed but are taking a job with higher pay at a new employer (or just increasing your hours or pay with your current employer) then it is just a matter of having the lender verify your new pay level with your employer – whether through a copy of your contract, recent paystubs, or a verification from your employer.
If you were previously out of the work force and are just starting a new job, lenders will need between six months to a year of continuous employment before they will count your income towards qualifying. They may also request information about job training, previous experience in the field, and the likelihood of continued employment from your employer in order to determine if this income will be continuous.
Every situation is unique! If you think this example might fit your clients, feel free to give us a call. We are always happy to provide information to help meet your client’s needs.