Over the decades I’ve worked in the mortgage industry, building and maintaining great relationships with all of my clients has been the best part about my job.
After studying neuroscience, I spent 20 years in the mortgage industry before joining the Commerce Home Mortgage team. My favorite part about working with CHM is helping first-time homebuyers get into their first home, and then their second home…and even their third home.
I love the outdoors so when I am not working I’m often mountain biking, running, snowboarding, or surfing in Hawaii.
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Getting separated or divorced is an unfortunate life event with complicated financial decisions, the most important of which may be what to do with the jointly-owned family home when one spouse wants to keep it. If you are divorced or legally separated, or currently going through a divorce or legal separation, there are several options to “buyout” the interest of your spouse or ex-spouse (for simplicity, either is referred to as “spouse”). If you don’t have the cash or other assets to do so, a cash-out refinance may be a good solution if there is sufficient equity in the property.
For example, in the scenario below, you would need a cash-out refinance of at least $225,000: $150,000 to pay off the existing mortgage plus $75,000 to pay your spouse. The loan-to-value ratio (LTV) in this example is 75% (i.e., $225,000 Loan Amount ÷ $300,000 FMV = 75%). This is only a general illustration and does not take into consideration loan-related fees and costs.
Fair market value (FMV) of home, per appraisal
Balance of mortgage
Spouse’s Interest, assuming a 50/50 division, per settlement agreement or court award
Minimum refinance loan amount
Depending on the circumstances and your spouse’s cooperation, this could be accomplished either before or after the final judgment. You should discuss the legal and tax implications of this and other options with your attorney or tax professional.
In this article, we’ll discuss some of the qualifying income requirements for loan approval. Some divorcing or separating spouses may be surprised to learn that they could qualify for an individual loan with limited employment or income history. For example, you may be able to use alimony or child support as qualifying income, or you could apply for a loan from a Community Development Financial Institution (CDFI), such as Commerce Home Mortgage. First, we’ll start with some basics.
Can I apply for a mortgage without my spouse?
Yes. In fact, by law lenders cannot consider your marital status in evaluating your creditworthiness or refuse to make you an individual loan due to marital status. A creditor may inquire about your marital status, but only using the terms “and “ Lenders generally cannot ask you for information about your spouse, unless you are relying on alimony, child support, or separate maintenance payments from your spouse as qualifying income (this is discussed further, below).
Does my spouse have to sign on the loan?
No. The law prohibits a lender from requiring your spouse to sign or co-sign on the loan if you qualify on your own. If you do not qualify on your own, your lender may ask for a co-signer or guarantor, but the lender cannot require that it be your spouse. That said, your spouse will have to sign a deed transferring his or her interest in the property to you.
What qualifications do I have to meet for an individual loan?
You must meet the lender’s minimum qualifying income, credit history, credit score and other credit guidelines, and the home must meet its collateral requirements. There is an array of mortgage products and options to consider, with varying eligibility requirements, depending on the lender, your credit history and credit score, equity in the home compared to the loan amount (loan-to-value or “LTV” ratio), your monthly housing and debts compared to your gross monthly income (debt-to-income or “DTI” ratio), your qualifying income, assets, and employment and income history, etc.
In community property states, if the divorce or legal separation isn’t yet final and you apply for a government-backed loan (FHA, VA or USDA), your non-borrowing spouse’s separate debts are generally included in your debt-to-income ratio, which can make it higher. The lender will verify your spouse’s debts through a credit report, but your spouse’s credit score is not considered. This does not apply to conventional loans, or after final judgment.
Community property states are Alaska (by agreement), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Can I qualify using income from part-time employment or alimony or child support?
It’s not uncommon for one spouse to have not worked outside the home during the marriage, or worked only part time. First, a lender cannot legally discount or exclude part-time income. As long as the amount of qualifying income and length of employment meet the lender’s guidelines, the lender must consider it.
Second, if you are receiving alimony, child support or separate maintenance (together “support”) payments, you may be able to use that as qualifying income, if you choose. You do not have to reveal income from alimony, child support or separate maintenance if you do not want the lender to consider it in evaluating your eligibility for the loan. Most conventional and government-backed loan programs require proof of continuation and stability of support payments by both –
The lender also may require information about the payer spouse to document his or her ability and willingness to make timely payments.
Note that, like other income that is not taxed by the IRS, income from child support payments are “grossed up” when calculating your DTI, usually by up to your income tax rate or 25% (or 15% on FHA loans). For example, if you receive monthly child support of $2,500, the lender may multiply that by up to 25% ($625) and add the result to the support payment amount, grossing up the qualifying income to $3,125. Since alimony is taxed as income to the recipient, alimony is not grossed up.
Can I get approved for a loan if I don’t have all of the required income or employment documentation?
Federal law requires most lenders to verify that you are able to pay back the loan (the “Ability-to-Repay Rule”) by considering and documenting your income, assets, employment, credit history and monthly expenses. But if you don’t have the documentation, the lender will not be able to approve you for the loan.
Some lenders, including Community Development Financial Institutions (or “CDFI’s”) are exempt from the Ability-to-Repay Rule. A CDFI is certified by the U. S. Department of the Treasury to provide credit and financial services to underserved populations. Commerce Home Mortgage is a CDFI and, because of its exemption, offers a unique non-conventional loan product, called the “Community Mortgage,” that is not subject to the Ability-to-Repay Rule.*
A loan from a CDFI may be a good option if you have the ability to repay the loan, but you cannot satisfy the stringent income, employment and other documentation requirements of the Ability-to-Repay Rule. For example, you may have irregular income or other unique circumstances.
If you are interested in obtaining a loan, please contact me to discuss all of our available loan options.
Calvin Cox | Partner-VP Mortgage Banking
Certified Divorce Lending Professional
* The Community Mortgage program is not available in all states and is not approved, endorsed, or sponsored by the U. S. Department of the Treasury. Note that “low/no” documentation, “no income” or similar loan products may have a higher interest rate, more points, or more fees than other products requiring documentation. Commerce Home Mortgage also offers a full range of conventional and government-backed or insured loan programs.
This material is for informational purposes only. Commerce Home Mortgage and its agents do not provide tax, legal or financial advice. You should consult your own tax, legal and financial advisors.