February 1, 2014
In January new mortgage rules took effect as part of the Dodd-Frank financial overhaul. The Qualified Mortgage Rule tightens the qualification for a mortgage and could have an impact on some divorces.
The new provision created an “ability to repay” rule which requires mortgage lenders to make sure the borrower is able to repay the loan according to the terms.
The new rule also established the “qualified mortgage” (QM). These loans meet certain guidelines so that the borrower is presumed to meet the “ability to pay” rule. Lenders of QMs have more protection against lawsuits in the future should the loan default.
This last point is very important. “All debt” means just that – existing mortgages, home equity loans, car loans, student loans and even includes current payments to colleges and private high schools.
It is common in a divorce for one spouse to buy out the other spouse’s equity in the marital home. What if the “staying in the house” spouse has low earned income, and will rely on alimony or child support to cover expenses – will there be sufficient income to qualify for a mortgage?
Alimony and child support will qualify as income if either has been received for 12 months and is to last for at least 3 years. There cannot be any missed or late payments, so be sure both parties are aware of this from the start.
For spouses that are re-establishing themselves in the workforce, they will need to show consistent income for a period of time. In addition their employer will need to sign off that they intend to employ the worker for 3 more years.
So what can we do for the divorcing spouse who is coming away with assets but doesn’t work and has no alimony or child support?
All of the above applies to the new “qualified mortgage.” Banks can still issue non-qualified mortgages (NQM). (Fannie Mae and Freddie Mac can issue them for the near future, until the government stops backing them - within the next 7 years.) NQMs include asset-based loans, in which the borrower’s income is presumed based on their assets. The value of all assets (less a 10% penalty for early withdrawals from retirement plans if applicable, and income taxes owed on retirement withdrawals) is divided by 60 and this amount is used as the monthly income figure.
So our soon-to-be divorcee, if given sufficient assets, could qualify for a mortgage based on the income imputed from the portfolio.
There are many nuances to the new rules. If you have a divorce client who will need to refinance their home or take out a new mortgage it would be beneficial to seek out a mortgage lender who has experience working with homeowners going through divorce.