Divorce and loan qualification… part 2
By Mike Miles
Last week’s post laid out some basics of what to know when borrowers come out of a divorce after it’s finalized. This week’s article will cover some basics when a divorce has not been finalized. I repeat; no two divorces are the same. Keep that in mind as you read this.
In many divorce situations, the two spouses no longer cohabit during legal separation and / or divorce proceedings. While the two parties can be friendly with each other, they probably don’t want to live together anymore. It is not uncommon for parties to have an idea of who, if any, will retain ownership of their primary residence. The big question for any spouse who leaves home is… when and how can they buy a new home?
Divorce judgment not finalized:
This one can get a little tricky as one of the loan application questions borrowers need to answer is whether someone has been divorced / is divorced. Responses to applications are meant to be representations of the truth. If a divorce has been legally filed, this question should be answered accordingly so that the underwriting can request the correct documentation. Depending on what has been filed / discussed, this documentation could indicate who will be responsible for the primary real estate and who will receive spousal / child support (although the amounts are not yet determined).
If nothing has been filed… the home buying process can take a few twists and turns. In Kansas and Missouri, any legally married borrower is not required to have their spouse listed on the loan application or on the acquisition of title. It sounds strange, I know. Technically, a buyer (spouse) could buy a new home on their own and not register the other spouse. The person on the loan has to qualify on their own (income, credit and down payment), and keep in mind that this does NOT avoid interest rights in the property from a legal point of view. Those legally married in Kansas and Missouri by default have equal rights to interest in real estate.
If a spouse takes this route, one of the sticking points would be whether the new home is larger or smaller (size and price) than their current primary residence. If it is smaller (in most cases it is), the subscription may force the purchase of the property as investment property rather than as principal. Investment properties require larger down payments and have higher interest rates.
What if a spouse does not have the assets to put enough money on a property purchased as investment property? They can do one of two things:
- Get a gift from the family for the down payment and / or have a non-occupying co-borrower added.
- If they are amicable and pleasant, they can ask their other spouse to sign the loan application with them, and then that spouse will hand over the property themselves once the divorce is filed and finalized.
If a divorce situation is not friendly but rather hostile, we advise any spouse to wait to buy real estate until the process is finalized. This would avoid the points of friction associated with disputes over ownership rights to owned assets.
Divorce is of course unhappy. However, it is a part of people’s lives and it can be complicated when it comes to buying / selling / owning real estate. As I mentioned last week, we have years of experience in almost any situation imaginable, and we would be happy to help guide you through the mortgage process.