I am fortunate to know Mitch Irwin of Bell Banks in that his niche lending practice is providing mortgages to divorcing parties. This includes new mortgages to divorcees who now need to account for child support and spousal maintenance orders in their income as well as refinancing existing mortgages in light of new divorce orders. Here is his latest report on the market and mortgage opportunities:
The good news is there are no major guidelines changes that would have a large, negative impact on divorcing clients; however you should be aware of a couple items:
1. FHA Advantages: FHA loans offer some very unique advantages to divorcing clients, but were not utilized much the last couple years because the mortgage insurance was very expensive. A recently announced reduction in MI premiums will make the monthly payment more competitive with conventional financing; particularly in cases of limited down payment/equity. Clients with a large down payment/equity will likely still choose a conventional loan (to not have MI at all), but for cases where there is only a small down payment available or limited equity for refinancing let’s look at ways an FHA loan might be beneficial.
a. Only requires 3 months receipt of child support and/or spousal maintenance income on the vast majority of files.
i. Some of you may have received emails recently from another mortgage company suggesting FHA loans require 12 months receipt, which is not accurate. About 95% of FHA loans are approved through an Automated Underwriting System and require just 3 months receipt of support payments. Only manually underwritten files require 12 months receipt; but those are maybe 5% of all FHA financing. For someone going through a divorce, the difference between waiting 3 months and 12 months to qualify for a loan is significant. Please be sure your clients are using accurate information.
ii. I have closed loans in 45 calendar days that was considered as 3 months in underwriting, because the payor was cooperative in the payment dates. An example how that was done is payment #1 was received at the end of March, payment #2 was in April and payment #3 was received in early May. The closing was around May 10th. So while it was only 45 calendar days, underwriting accepted it as 3 months of income received.
iii. Temporary payments can be used; however remember most lenders require it be subject to a temporary court order (not just a loose agreement between parties). The decree should also state when support payments started. See section #2 of my quick reference guide for other helpful info.
b. Allows paying off two existing loans to 97.75% of the appraised value. This works really well for clients that have two loans and want to combine into one as part of a divorce refinance. Conventional loans usually consider combining two loans into one new loan a cash-out transaction and limited to 80% of the appraised value (unless the second was used to purchase the home). FHA is slightly different and states as long as there have been no draws (on a HELOC) in the last 12 months, the second is seasoned and can go to 97.75% of the appraised value. I have closed loans that paid off a first mortgage, HELOC and a marital lien and kept the loan rate and term with FHA. See Marital Lien guide for additional tips.
c. More flexible on Debt to Income Ratios. FHA will occasionally approve a loan up to a 54% debt to income ratio, where conventional is usually maxed at 45%. Now, I don’t usually encourage a loan with that high of debt ratios; however there are two exceptions where it looks higher on paper than it will be in real life dollars:
i. When someone is qualifying with-out child support income. If the borrower uses their own employment income and wants to close right away, they might qualify now and not have to wait for the 3 months receipt of support payments to close the loan. This allows closing faster.
ii. When someone is paying spousal maintenance. Lenders treat spousal maintenance the same as child support and therefore do NOT recognize the tax deductibility of maintenance. This can create a glitch where some clients can afford a house in their cash-flow budget but can’t qualify for a home loan. Being able to push the debt ratios higher can mean the ability to get a loan that would be denied conventional, without putting them in a bad financial position.
d. More flexible on credit scores. FHA mortgage insurance is the same for a credit score of a 641 as a 741. Conventional loans are more score driven and the price changes with the score. Therefore a lower or middle tier credit score borrower may see the same (or lower) payment on an FHA loan.
e. More flexible on co-signors. Conventional loans only allow a co-signor’s income to be used when there is a 20% down payment (or equity). FHA allows at all LTV levels; which is 85% for a cash-out refi, 96.5% to buy a home and 97.75% for a rate and term refinance.
2. Continuity of Obligation: When you meet with a client, check to see if the current loan is in the name of both parties or just one. If the home is awarded to the spouse that is NOT currently on the loan, then there is no “continuity of obligation” so the refinance transaction will be considered cash-out and therefore limited to 80% of the home’s value for a Conventional loan and 85% for an FHA loan. This can impact the amount of a marital lien that can be paid or the timetable for closing a loan. It doesn’t happen a lot, but I am noticing it more and more so I want to bring it to your attention.
As always – please contact me with any questions. I am happy to explain guidelines, answer scenario questions or meet with clients to review options. My primary office is in Woodbury; but I frequently meet clients in our Edina, Maple Grove, Minnetonka and other satellite offices. Location is never an issue.
NMLS Number #451627
Bell Mortgage | A Division of Bell State Bank & Trust
Edina, Minnetonka, Woodbury
Phone 612.210.3640 | Fax 855.789.3832
www.mitchirwin.biz | www.bellbanks.com | email@example.com
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