This year, we’re continuing our tradition of inviting a handful of our most trusted colleagues to share their ideas and expertise on topics of interest to our clients. For this blog, we’re excited to again feature Dennis Smith of Stratis Financial. Dennis and his team are residential mortgage experts and have helped many of our clients buy or refinance their homes. With a divorce comes other separations of assets and obligations. Dennis shares insight on the challenges around credit and mortgages through divorces…
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Most divorcing couples think the only long-lasting (financial) impact of their divorce is the support payments that one may be paying and the other receiving. However, separating assets and debt obligations during a divorce may have personal impact well beyond the date the divorce is final.
Separation of assets in divorce negotiations typically involves dividing marital assets after reviewing statements from checking, savings, investment and retirement accounts and obtaining an appraisal of real estate if any property is to be retained by one spouse.
Separation of obligations can be a bit more challenging. Mortgages, auto loans, and credit cards in most marriages are co-signed by both spouses; each is 100% obligated for the entire balance. Each joint credit account reports on both spouses’ credit reports. Before finalizing a divorce, each party should request credit reports from the three major credit bureaus (Experian, Equifax and TransUnion) for a complete list of outstanding accounts and balances. Notify all accounts that are joint that divorce proceedings are underway and that you wish to be removed from the account. Some companies will require that the account be closed while others will enable the removal if the other spouse agrees. When the divorce is final, there should be no joint credit accounts open.
Auto loans and mortgages will not remove a signer without the obligation being paid off, which can be done either through sale or refinance by the spouse retaining the asset.
For mortgages, we often refinance a property in the name of one spouse, and if required, pull equity out of the property to “payout” the other spouse for their share of the equity. This process, if done incorrectly, could lead to an unnecessary higher interest rate and/or cost to the spouse who is retaining the home. Consult a qualified mortgage specialist if you are using this strategy.
An issue that comes up when qualifying for a mortgage is spousal or child support payments as sources of “income.” The underwriting guidelines are a bit skewed in that the paying spouse has the payments counted against them as a debt obligation immediately upon signing the property settlement agreement. In contrast, the receiving spouse does not get credit for the payments as income until it can be shown that payments have been received on a timely basis for six months in a row. Note, this is not six months of payments, but payments made each month for six months (no gaps!). Child support payments follow the six-month rule but they also have a three-year rule (beyond the scope of this blog but important details if this applies to you!).
Divorces are complicated and emotional. Proper communication and collecting of information can, in most cases, bring clarity and resolution to both parties. This should result in a less stressful process. In addition to lawyers, financial planners and accountants call on a mortgage professional when negotiating a property settlement to discuss what options are available after the divorce is final in order to retain a current residence or purchase a new one, avoiding unpleasant surprises down the road.
Dennis has been in the mortgage industry since 1987 and with his partners opened Stratis Financial in 1999. Dennis and his wife, Leslie, have been married for twenty-six years and have two daughters, one a junior at Boston University and the other a freshman at Pace University. When able to get away, Dennis enjoys golf, putting some meat on the barbecue, and sipping some whiskey with friends talking about the events of the day.
Inspired Financial empowers clients – primarily women and families – to feel comfortable managing their financial lives, especially during and after times of significant change. We stand with and educate clients during all life stages, instilling in them financial peace of mind, and allowing them to live a simple and elegant life. Caring for clients as if they were family – that’s what Inspired Financial advice is all about.
