New Mortgage Rules: The Effects on Separation and Divorce

By Tracy Fischer

Recent Fannie Mae mortgage guidelines changes are causing delays and difficulties among couples who are going through separation and divorce. It is crucial to be prepared and to know what to expect. In the past, husbands or wives could fairly easily begin the process to move on by preparing to purchase a new home. Sometimes, this included either selling the marital home and each purchasing new homes, or one person retaining the marital home by refinancing. Completed and finalized divorce agreements were not always necessary.

Often, couples may have lived together in the home and planned on separating and divorcing while waiting for more optimal market conditions or better springtime weather before putting the marital home on the market and each going the separate ways into new homes. Sometimes, couples want to wait until they were sure of their final plans before telling their children.

The wait and delay may now end up becoming even longer. Fannie Mae has specific new regulations for documentation of income. If child support or alimony is to be used as income for purpose of mortgage qualification, that stream of income must have been occurring regularly and there must be actual evidence of the payment for six months to one year. In addition, that stream of income cannot be a voluntary payment, it must be a legal requirement, under a court divorce decree or separation agreement. If the parties are not divorced, and only separated, voluntary payments made “by agreement” cannot be considered for purposes of income verification.

In addition, the spouse who may be refinancing the marital home and “buying-out” the interest of the other also will need a “final” divorce agreement or judgment to show what their obligation for child support and/or alimony may be.

So what does all this really mean to a couple who are contemplating divorce? First, these rules affect the eligibility of the person who is paying support as well as the person who is receiving support. For example, if the person who would be paying support wants to purchase real estate with a mortgage, there will need to be documentation for them as well as to what their “obligations” will be. Couples who choose to refinance to lower a mortgage payment prior to separating may be in for a surprise. The past three months of bank statements and checks will be researched. Any evidence that a divorce is on the horizon will be investigated and the loan may be denied or postponed if intention to divorce is confirmed. A check to a parenting class or lawyer may be enough to cause the alert.

Couples can plan in advance so they are in a good position to show the six month track record of regular timely payments. Couples may prepare by living separately and instituting regular support payments while they are going through the divorce mediation process.  If the couple is separated they can start documenting the payments right away. Planning for these mortgage income qualification requirements now needs to happen much further in advance. Couples may need to think about separating earlier than planned just to show the six month payment history. The lender is going to look at bank statements and if full or partial payments are made on an inconsistent or sporadic basis, the income will not acceptable for the purpose of qualifying the borrower. In addition, there needs to be documentation that the income will be received for three years from the date of the application, even the ages of the children are considered.

Advance planning is key when preparing to divorce and purchase a new home or refinance the marital home. Choose a lender or mortgage broker who is experienced in dealing with the particular concerns that come up with divorcing couples. Be aware of the issues that may affect you so that unforeseen delays are not necessary.