Welcome to Divorcing Your Mortgage November 2017 Newsletter. In this episode we are discussing avoiding language traps. We know it is important to be very mindful of the words used in a divorce settlement agreement in order to avoid any language traps and future conflict. Word choice can have an affect on the divorcing client’s ability to obtain mortgage financing as well. While it may not be top of mind to word the divorce settlement agreement to meet mortgage guidelines, it could significantly help your client to clarify certain terminology used in the settlement agreement.
The terms “alimony”, “maintenance” and “spousal support” are often used interchangeably to describe payments made by one spouse to another after a divorce. The terms are identical in meaning but not necessarily in the eyes of an underwriter.
As an example: From a liability / debt perspective, FHA guidelines differentiate between alimony and maintenance while Fannie Mae does not.
If your divorcing client is paying ‘maintenance’ and needs to obtain mortgage financing, you can help them avoid any terminology issues by clarifying that alimony and maintenance are considered to be the same. It could be beneficial to include a clarifying statement such as:
“All maintenance payments paid by Husband to Wife pursuant to this agreement are intended to constitute alimony or periodic payments deductible by Husband pursuant to Section 215 of the Internal Revenue Code, as amended from time to time, (the “Code”) and includable as in- come to Wife pursuant to Section 71 of the Code on their respective state and federal income tax returns.”
Equalization payments as income can be another item of contention for mortgage approval. Often times a divorcing client prefers to have what would typically be considered maintenance to be classified as an equalization payment to mitigate income taxes. However, since a property equalization payment is intended to equalize the final division of property between parties to a divorce, it is more likely to be determined as income from a property settlement note. There are strict mortgage guidelines on income from property settlement notes. The recipient must document 12 months receipt of the equalization payment before it will be considered as qualified income for mortgage qualification purposes.
If I can provide guidance in making sure there are no language traps between the intent of the divorce settlement agreement and mortgage guidelines, please don’t hesitate to contact me. It is much easier to get it right the first time than risk mortgage denial because of word choices or lack of clarification.
How Student Loan Debt Effects the Mortgage in Divorce
We have all seen many parents who have their own student loan debt or have co-signed student loans for their children. Mandating which spouse will be responsible for making those student loan payments in the divorce settlement agreements should be worded carefully as well to avoid even further language traps.
Let’s assume that Mary co-signed for $50,000 in student loans for her son. The divorce settlement agreement states that Sam will be responsible for future educational expenses for their son. Mary’s understanding is that Sam will be responsible for making the payments on the $50,000 of student debt. Even if Sam’s interpretation is the same, from a mortgage perspective Mary will need to include the monthly payments for the student debt on her mortgage application because the divorce settlement agreement does not specify the existing debt.
In order to avoid the $50,000 of student debt negatively affecting Mary’s debt to income ratios, the divorce settlement agreement needs to specifically state that Sam will assume the responsibility of making the payment on the existing student debt including account numbers and specific loan amounts.
The Puzzle Pieces of Divorce
A successful divorce settlement is the result of putting the pieces of the puzzle together in such a manner that both divorcing parties come out of the divorce whole. Certified Divorce Lending Professional When the divorce settlement involves real estate and mortgage financing, the Certified Divorce Lending Professional on your team plays a significant role in putting the pieces of the puzzle together by recognizing the hurdles and opportunities available for both parties.
• You need a mortgage professional on your team that has a game plan for the mortgage financing needs of your divorcing clients.
• You need a mortgage professional that understands the legal and tax implications of mortgage financing in divorce situations.
• You need a mortgage professional that can identify support and maintenance issues that can create financing challenges post decree.
• You need a mortgage professional that has the knowledge to help divorcing clients understand and evaluate their mortgage options related to cash flow and equity management.
• You need a mortgage professional that specializes in divorce lending strategies.
• You need a mortgage professional that can help you complete the divorce puzzle.
Why You Need a Certified Divorce Lending Professional on Your Professional Divorce Team.
A professional divorce team has a range of team players including the attorney, financial planner, accountant, appraiser, mediator and yes, a divorce lending professional. Every team member has a significant role ensuring the divorcing client is set to succeed post decree.
A Certified Divorce Lending Professional brings the financial knowledge and expertise of a solid understanding of the connection between Divorce and Family Law, IRS Tax Rules and mortgage financing strategies as they all relate to real estate and divorce. Having a CDLP® on your professional divorce team can provide you the benefit of:
• A CDLP is trained to recognize potential legal and tax implications with regards to mortgage financing in divorce situations.
• A CDLP is skilled in specific mortgage guidelines as they pertain to divorcing clients.
• A CDLP is able to identify potential concerns with support/maintenance structures that may conflict with mortgage financing opportunities.
• A CDLP is able to recommend financing strategies helping divorcing clients identify mortgage financing opportunities for retaining the marital home while helping to ensure the ability to achieve future financing for the departing spouse.
• A CDLP is qualified to work with divorce professionals in a collaborative setting.
• A CDLP can provide opportunities in restructuring a real estate portfolio to increase available cash flow when needed.
• A CDLP maintains a commitment to remaining educated and up to date in the ever changing industry guidelines and tax rules as they pertain to divorce situations.
• A CDLP is committed to providing a higher level of service to you and your divorcing clients.
The role of the CDLP is to help not only the divorcing client but the attorney and financial planner understand the opportunities available as well as the challenges divorce can bring to mortgage financing during and after the divorce. When the CDLP is involved during the divorce process and not after the fact, many potential financing struggles can be avoided with valuable and educated input from the Certified Divorce Lending Professional.
“Nothing matters more in winning than getting the right people on the field. All the clever strategies and advanced technologies in the world are nowhere near as effective without great people to put them to work.” – Jack Welch, Winning
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Copyright 2017 All Rights Divorce Lending & Real Estate Association, LLC
The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
Richard Woodward, NMLS 217454
Your Local, Direct, 5 Star Rated Mortgage Lender, Specialty Lending Manager
Office: (214) 945-1066
Service First Mortgage NMLS 166487
6800 Weiskopf Ave #200, McKinney, TX 75070
Licensed by the Texas Department of Savings and Mortgage Lending (SML) Mortgage Banker Registration. Service First Mortgage is an Equal Housing Lender. This is not an offer of credit or commitment to lend. Loans are subject to buyer and property qualification. Rates and fees are subject to change without notice. The views expressed on this site are those of the individual author and do not necessarily reflect the positions, strategies or opinions of Service First Mortgage or its affiliates.