One of the biggest financial and emotional decisions negotiated during the divorce process is a couple’s home. Even if you have gone through the divorce process, you may need to consider refinancing the marital home or purchasing a new home. In either circumstance, the process can be super stressful and overwhelming. The good news is that there are many options to help meet each person’s financial health and each couple’s division of equity in their home. “With good planning we can find the best solution for each divorced couple,” says Ashley Milam, a mortgage banker with Highland Mortgage.
In this month’s Divorced Living: Your Questions Answered, Ashley Milam, shares some very helpful tips about mortgages and refinance options that can help people transition to a divorced home owner.
When is the best time for a divorced person or divorcing couple to start working with a mortgage broker?
Believe it or not, meeting with your mortgage broker before the divorce is finalized is the best strategy to help you plan and make critical decisions about your current mortgage and home equity. This is a pretty common strategy used by about half of our divorcing clients because it allows each person to know their options in advance and plan for the financial requirements of a new or refinanced mortgage.
What are the refinancing options for divorced couples when one spouse wants to stay in the home?
The most common option is the Cash Out Refinance (COR). With a COR, one spouse comes off the mortgage and title, while also getting their agreed upon share of the home’s equity.
The Rate in Term Refinance is another option, although much less common. With this option one spouse is removed from the home mortgage and title. No equity is taken out.
What financing options are there for the divorcing spouse, who does not meet the income requirements for a new or refinanced mortgage?
Income, assets, home value and demonstrating the ability to consistently pay the mortgage are critical pieces of information the underwriter assesses when approving a mortgage loan application.
If you are concerned that you will not meet certain criteria, you do have options such as having a family member or friend be a non occupant co-borrower or cosigner be part of the application process. Their income, credit score and liabilities are used to demonstrate credit worthiness. They can co-sign the loan but are not required to be on the house’s deed.
Another option is to use your child support or alimony as proof of consistent income. You will need to demonstrate that you have been receiving it for at least six months and that it will continue for at least three years. It is important to note that you must also provide the final decree and child support order (if applicable) to leverage alimony or child support as qualifying income.
If you have a low credit score, you can improve it by paying down credit cards to below 30 percent of the maximum you can borrow and consistently making timely payments.
Mortgage rates are starting to rise after being historically low, how will this impact the mortgage refinance market?
Mortgage rates are absolutely increasing and we expect this will continue well into 2022. One strategy we can utilize is to lock in your new interest rate for 60 or even 90 days. The benefit is that your mortgage rate is guaranteed despite market rate increases and if it should decrease by a quarter of a point or more, your interest rate will be adjusted at closing.