Do's & Don'ts for Mortgages During Divorce

Divorce is often emotionally and financially challenging, but following a few key do's and don'ts will minimize the frustration and help both parties weather the process in better financial shape.

Divorce is often emotionally and financially challenging, but following a few key do's and don'ts will minimize the frustration and help each party weather the process in better financial shape.

Do's

1. Engage a mortgage lender into your divorce team very early in the divorce process.

With a mortgage lender on your divorce team, clear choices and implications of each choice are known up front, which can minimize the emotional challenges of divorce and clarify the paths to consider during your settlement negotiations. Ultimately this will smooth the path for a settlement agreement that supports current and future mortgage financing needs.

2. Get an appraisal on existing property

The fee for an appraisal performed by a professional appraiser is worth every penny in terms of time and paperwork saved.

3. Regularly check your credit

Everyone is entitled to get one free credit report from each of the three credit reporting agencies each year. I recommend requesting a report from one agency every 3-4 months during your divorce in order to stay on top of your credit history.  Credit reports are available at www.annualcreditreport.com.

4. Keep up with all your bills and financial obligations

If your name is on a bill or obligation - even if you believe your soon-to-be ex is responsible for a bill - make sure it gets paid on time, every time it is due. Late and missed payments can wreak havoc on your credit score, which can create significant challenges for your ability to borrow money long into the future.

5. Close any equity lines of credit on your existing property

If you have a HELOC (home equity line of credit) on your existing property and it is in the names of both spouses, close it! Having a zero balance does not mean that the account has been closed; you must specifically request that the HELOC be closed. Leaving the HELOC open presents an opportunity for one of the spouses to use it, creating a new liability for both spouses.

Don'ts

1. Do not apply for any new mortgages before the divorce is final

You may feel that applying for new mortgages (refinance or new purchase) during the divorce process is helping to speed things along, but you may in fact be committing mortgage fraud without realizing it.

2. Do not agree to any divorce settlement agreement prior to speaking to a mortgage lender

If you plan on refinancing or buying a new home, check with a mortgage lender to make sure the divorce settlement agreement sets you up properly to qualify for a new loan. This is especially important if you require any support payments as qualifying income. The general rule of thumb is that you need at least 6 months history of support payments and at least 36 months of continued payments into the future to consider support as qualifying income for a mortgage, but there are many nuances and rules here that may be missed. Working with a mortgage lender early in the divorce process is best to avoid any issues, but engaging one at any time is better than running into issues after the divorce.

Rebecca Thorburn is a Loan Officer with PrimeLending. She is happy to answer your divorce-related mortgage questions and be a part of your divorce team.

Mortgages for Doctors and Physicians

Residents and existing Doctors can benefit from a mortgage offered by some banks called a Doctor or a Physician Mortgage. The Doctor Mortgage offers special underwriting and rates to residents as well as just starting out doctors who may not have significant salary history yet or a long credit history. This can resolve the problem that many young professionals face of having excellent earning prospects but being unable to quality for a mortgage and buy a home.

In general, a doctor/physician mortgage provides the following benefits: 

  • Is made to a resident or Doctor (7-10 years out of residency), and often dentists, veterinarians, attorneys, and other skilled professionals.
  • Requires little down payment (between 0-5%).
  • Doesn't require the use of Private Mortgage Insurance (PMI).
  • Will accept a job contract as evidence of earnings versus most mortgage programs that require up to two years of pay stubs and tax filings.
  • May allow the purchaser to use gifts as a down payment (many mortgages do not allow gifts to be used for the down payment).
  • Usually do not calculate student loan debt towards the loan/income ratio.
  • Provides the same rate whether the loan is a conforming or jumbo loan.
  • Requires a decent credit score and a loan to payment ratio of between 30-40% depending on the bank.

Below is a comparison of a doctor mortgage versus a conventional mortgage for a 30 year fixed rate loan.

                                         Doctor Loan                 Conventional Loan

Amount:                                $435,000                       $435,000

Down Payment %:                   0%                                 5%

Down payment amt.:              $0                                    $21,750

PMI:                                     $0                                    $213.51

Interest rate:                         4.490%                         4.250%

Monthly Payment:                  $2,201.50                      $2,246.46

* Data supplied by Stephanie Arcelay from SunTrust Mortgage as of May 14, 2014.

As you can see, the rate on doctor mortgages are often are slightly higher than a conventional loan or an FHA loan but the low down payment and fees often offsets the higher rate. And once a doctor has built some earning history and equity, they can refinance to a lower conventional  rate. 

See mortgage rates today.

Government Shutdown's Impact on FHA Loans

The government shutdown will not close the FHA, but it might slow approvals to a trickle.

Recent reports have stated that the government shutdown would virtually shutter the FHA, preventing the agency from approving any additional FHA backed loans. This is significant since 45% of all home purchases last year were made with an FHA backed loan. 

But in what appears to be a change in its position from last week, the U.S. Department of Housing and Urban Development (HUD)’s Office of Single Family Housing said that it would continue to endorse new loans “in order to support the health and stability of the U.S. mortgage market” 

While HUD and the FHA  will remain open, it remains to be seen how many loans will actually be endorsed. It is estimated that only 4% of HUD staff will remain at their jobs as "excepted" employees. With approximately 60,000 loan applications per month, it's hard to see how this skeleton staff will be able to handle new applications. 

If you are planning to get an FHA-backed loan, I'd recommend either hoping for a quick resolution to the funding deadlock, looking for an alternate funding source for your home, or delaying the purchase of a home until the standoff is resolved.