Paying Alimony? You May Want to Consider an FHA Insured Mortgage

UPDATE: You no longer have to FHA if you’re paying alimony... Fannie Mae and Freddie Mac have updated their guidelines. Check it out here!

Most mortgage originators know that if you have less than 10 payments remaining with alimony or child support payments, it may not have to be factored into your qualifying ratios (debt to income) as long as the payment doesn’t impact your ability to pay the mortgage following closing.  A borrower needs to be well qualified with plenty of savings for an underwriter to support this guideline. [Read more…]

Breaking Up is Hard to Do…Especially When You Own a Home Together

I’ve written articles before about issues to consider if you’re going through a divorce and have a mortgage…what if you were never married?  Couples (or single people) often buy homes together…what if worse case scenario, it doesn’t work out and one party wants to keep the home?

A divorce decree allows you to refinance to cash out the other spouse and still have the mortgage treated as a “rate term” refinance.  There are significant differences between a cash-out and rate-term refinance.  A cash out refinance is limited to an 85% loan-to-value and the rate is higher (approx. 0.5% in fee at an 80% loan to value with credit scores of 740 and higher).  If there is a court order, it’s possible that FHA might allow a cash-out refi with a non-married co-owner.

There’s also the issue of excise tax.  An excise tax affidavit is filed whenever a deed is recorded (in the State of Washington).  Excise tax may not be due when the person being removed from vesting is pursuant to a divorce decree.  However, when there is no decree or court order involved and the person is being removed, excise tax may be due as they consider the transfer of that person’s interest to the other person “a sale“.  I’m told the county may charge excise tax on half of the underlying mortgage.  As of the date this post was published, King County charges 1.78% for excise tax.   Possible exceptions to this would be if the co-owners were registered as domestic partners, or the transfer of the property to one co-owner is by court order. 

Just like a divorce, simply deeding the property over to the party who’s remaining in the home does not remove the other person from responsibility or liability of the mortgage.  And it probably makes good sense to contact an attorney who specializes in divorce to assist with the separation of the real estate property.

EDITORS NOTE: This post was written in 2009 and may not be as accurate with regards to excise tax with laws regarding recognizing partners since the writing of this post.

Divorce, your mortgage and your credit

Whether you’re married or are a couple who own a home together and are now facing a separation, dissolving a partnership is never easy.   Even if both parties are amicable and agree to the break up, it is a very emotional time.  You may just be thinking about who gets to keep the house…or you just may want out and not even care about the property.   Your mortgage and credit history is probably the last thing on your mind…however, you may want to consider protecting the credit that you’ve worked hard for.   

Do contact an attorney who specializes in divorce.   Even if you just contemplating a divorce and you’re not certain you will file.  It’s important to find out the facts and get legal advice from a professional. 

Obtain your current credit report.   You can get a free copy from www.annualcreditreport.com.    Review it to make sure that your debts are in order and that the other party is not using your credit for “retail therapy”.    Identify which accounts you may want to close if they have your name on them.   The credit company may be all too happy to issue your own card in your own name.    Having an ex-partner with your credit, even if you’re getting along now, can wreck havoc on your scores.   If your name remains on an account they have, even if they pay the debts on time, if the balances exceed 30% of the limit on a credit card, your credit score will suffer too.   

Consider closing any joint accounts immediately that are not in use and removing your name from any accounts that you are a signer on.

Secured accounts, such as loans attached to vehicles and mortgages must be dealt with too.   You might consider selling the items that have secured loans in order to remove your name and liability from the debt.   Otherwise, you should consider refinancing the loan.   Plus, the payments may be factored as your debt when qualifying for new loans, such as a  mortgage.

Should your ex-partner decide they want to keep the house, require that they refinance the mortgage so that your name can be removed from the debt.   Deeding the property from one person to another does not remove the liability of the mortgage.   Even if your partner is a really nice person right now, if they lose their job 5 or 10 years from now, and your name is still on the mortgage, it will dramatically impact your credit if the bills are not being paid. 

If your ex-partner does not qualify for a refinance of the property, then how can you expect them to make the payment?  It’s too risky.   

One of my friends went through a divorce.  Her ex really wanted the house.  He did not qualify for the mortgage on his income alone and wasn’t thrilled when she insisted that he needed to refinance to take her name off of the mortgage.   Although it was a tough decision, they sold the house and split the proceeds.   He remarried and bought another house with his new wife and in just a few years, filed bankruptcy and the home was foreclosed.   Imagine what would have happened to her credit if she would have accepted the cash offer of her share of equity without refinancing the mortgage out of her name?  She would have been responsible and included in the foreclosure.   Her credit would have been trashed and it would be extremely difficult for her to buy a home.   

Should you divorce, your divorce decree will not override your agreements with creditors.   It’s important to be proactive and to always take steps to protect your credit.  Although credit scores are reflective and not permanent, bankruptcy and (especially) foreclosure will impact your credit scores and interest rates for years.

Remember, take precautions with your mortgage, credit history and consult with an attorney if you are considering a possible divorce.