Douglas Katz – 12 February 2021
One of the top questions that I get from clients in my divorce lending practice is can I afford my marital home post divorce. This is a valid question and I am invariably able to provide them consul on their borrowing power. The error that many make, however, is to not add to that a question of when they should refinance. While the loan process is completely objective, there are external components of a loan file that can drastically impact a loan decision. Additionally, components of an applicants financial situation can change impacting a loan decision. It is, therefore, essential for divorcing loan applicants to have a plan including a timeline for disposition of the marital home.
Undoubtedly, most marriage settlement agreements denote a period of time for a refinancing spouse to close on a loan. This provides a deadline after which there can be outcomes like forced sale of the home. Too often clients look at the deadline as when they should refinance when they should be focused on the best time to refinance to maximize their terms and chances of success. Good timing can be based on luck, but more often, timing is the result of good planning. By following some basic recommendations and considerations, a divorcing homeowner who needs to get their home refinanced can enhance the good timing of a loan application.
- Rate – I will preface this by saying that I generally tell my clients that it is difficult if not impossible to time the market for the best rate, which is generally true. This advice is when I have a borrower who is myopically evaluating rates to try and time the absolute bottom. The timing of a mortgage rate in the context of a divorce can be completely different, especially when the loan applicant’s debt ratio is very close to the allowable limit. I routinely tell my clients that they need to be cognizant of the potential for rates to rise at any time. Forecasts and predictions are great, but when the possibility of a rate increase can result in a loan denial, borrowers should go with a bird in the hand.
- Home Values – Like rates, home values vary with market conditions and like rates, home values can have a profound impact on a loan. The value of a home impacts loan-to-value. For most loan programs, loan-to-value contributes to determining the rate. Higher loan-to-value loans are generally considered riskier and will bear a higher rate. Additionally, most mortgage loan programs have a maximum loan-to-value above which a loan cannot be approved. Under any loan program, the difference can be impacted by as little as 1% of value, For example, a cash out refinance for a Fannie Mae Loan is limited to 80%. If the value of the home results in 81% LTV, that loan will be declined or it will require restructuring to meet the 80% tolerance. If a home value allows for the refinance to be done, it is my opinion that they should proceed to ensure that they can get the loan done.
- Alimony and Child Support – This can have an impact because many programs have a requirement for verified payments of alimony and child support to be able to use it for approval. While this is a guideline and cannot be directly influenced by the applicant, divorcing homeowners must plan for when they will be able to use this income as it is essential in many cases. All loan applicants who need alimony and/or child support to qualify should work these requirements into their plan. In some cases, there are measures that an a divorcing homeowner can take to manage this requirement and they should work with a trained and/or certified divorce mortgage professional to assist them.
These planning considerations may seem simple and they are. As we all know, however, simple and easy are two different things. When an applicant is in the thick of the divorce process or focused on the building of a new life, steps like refinancing can get kicked down the road. Additionally, when looking at the numbers for a mortgage loan, everybody wants the absolute best terms which can also short-circuit the logical step to immediately get the deal done when the possibility of saving a few bucks is out there. This is gambling. My answer to the why for many of my clients is that they should do the deal when the deal can be done.