Divorce scenarios can be tricky depending on what’s needed which is why we made it an entire section in the Financial Advisers Mortgage Cheat Sheet. For example, Fannie/Freddie want a minimum of 6 months of alimony/child support payments being received before they’ll consider allowing that income which means someone could be homeless for months after. Truthfully the guidelines call for 12 months of receipt but 6 months can be considered. Moreover, those payments better come in like clockwork otherwise there’s no chance of using that income.
Separations & Rule 11
If someone is in the midst of a divorce a Rule 11 separation agreement can exonerate a borrower from certain liabilities. It should be noted that if the divorce isn’t finalized by the time someone closes on loan AND they don’t have a Rule 11 agreement, the soon-to-be ex-spouse will need to sign title docs. This isn’t a big deal (assuming all parties are willing to play nice) because the divorce decree can award the new home and loan to the proper owner.
The major concern with a soon-to-be ex-spouse would be if they are on the loan. While a divorce decree supersedes the note’s financial obligation, the mortgage will continue to report on the Ex’s credit until the loan is paid in full. This means that years down the road if the note’s owner misses a mortgage payment, that derogatory credit will be reported and negatively impact the Ex’s scores.
An owelty refinance is a “cash out” refinance that allows the home’s equity to be split among the owners. While this is most often used for divorcing or separating couples, we seen instances where sibling or co-inhabitant have used this refinance. It’s basically a “normal” loan with a few nuances from the lenders and title’s perspective.
Loan Officer, NMLS # 729612