Common Credit Concerns with Divorcing Couples

Concern 1: Mortgage Payment is Missed

Whether an oversight or intentional, when a mortgage payment is missed there are more repercussions than just a negative hit to the credit score.

  • A single 30 day late mortgage loan payment can cause a credit score to drop by as much as one hundred points.
  • A single 30 day late mortgage loan payment may prevent mortgage financing from 12 months up to 24 months depending on the loan program and investor.

Concern 2: Marital Home in Foreclosure Proceedings

Many times in a divorce situation there are financial struggles and often times the marital home is involved in foreclosure proceedings. 

If foreclosure proceedings have already begun the best option and sometimes the only option is to contact the current lender/servicer to determine if there is a loan modification or alternative plan to salvage the marital home if this is desired. Once the foreclosure proceedings are underway, new traditional mortgage financing is very difficult if not impossible to obtain. Even if the foreclosure proceedings were resolved, the recent mortgage payment history stated above will be a factor in obtaining new financing.

Concern 3: Joint Marital Debt Retained Post-Divorce

When it is currently not possible or not the best option to close out joint marital debt the court may order one party responsible for the full payment of specific debts. When this occurs, the debt is considered a “Contingent Liability” and for mortgage financing purposes, contingent liability is not typically included in the debt to income ratio for the party not responsible for the joint marital debt. But what happens if the responsible spouse makes a late payment on the joint obligation?

  • The credit score of both spouses will be affected negatively as both individuals are still liable to the creditor.
  • For mortgage underwriting purposes, if the debt was ordered to be paid solely by one party per the Marital Settlement Agreement, the payment history of the debt after the contingent liability was ordered may not be considered by the mortgage underwriter.
  • Contingent Liability guidelines are applicable to all joint marital debt including mortgage financing, auto loans, installment loans, credit cards, etc.

If you have any questions about your credit situation, give John Schutze a call at (512) 524-8310. 

Income vs. Qualifying Income

The two most common reasons why divorcing clients are unable to successfully obtain mortgage financing have to do with qualified income and credit. The best way to avoid these issues is to consult with a qualified divorce lending professional during the settlement process rather than after the marital settlement agreement is final—this can make a big difference in ensuring the successful execution of the MSA and avoiding a possible Contempt of Court issue.

Let’s take a look at the common income and credit issues that can prevent a successful mortgage transaction.

Income vs. Qualifying Income

Often times in a divorce and mortgage situation there are various types of income to consider: Employment Income; Alimony/Maintenance Income; Unallocated Maintenance Income; Child Support Income; Property Settlement Note Income; and more. Although all sources of income are considered “income” by the recipient, it is important to understand that from a mortgage financing perspective, not all sources of income are considered “Qualifying Income.”

In order to be considered as “Qualifying Income” certain requirements of each income source must be met. For divorcing clients who will need mortgage financing once the divorce is final, involving a mortgage professional who specializes in Divorce Mortgage Lending during the divorce process rather than post decree can potentially help avoid common pitfalls when “Income” is not considered as “Qualifying Income.”

Let’s take a look at some of the most common income issues in divorce situations with regards to Alimony/Maintenance and/or Child Support.

Alimony/Maintenance, whether unallocated or allocated, along with child support must meet specific requirements to be considered as “Qualifying Income” for mortgage financing purposes by meeting both continuance and stability tests.

Continuance: A key driver of successful homeownership is confidence that all income used in qualifying the borrower will continue to be received by the borrower for the foreseeable future. Must be able to document that income will continue to be paid for at least three years AFTER the date of the mortgage application. Check for limitations on the continuance of the payments, such as the age of the children for whom the support is being paid or the duration over which alimony is required to be paid.

Stability: A review of the payment history is required to determine its suitability as stable qualifying income. To be considered stable income, full, regular, and timely payments must have been received for six months or longer, provided the income does not represent more than 30% of the total gross income used to qualify for mortgage financing. When the income represents more than 30% of total gross income, a longer period of receipt may be required. Income received for less than six months is considered unstable and may not be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.

Back to Work: Oftentimes one spouse has been out of the workforce for an extended absence while raising the children. Even though this spouse may have recently returned to the labor force, specific requirements must be met in order to use ordinary employment income as qualified income. The borrower must be currently employed in the current job for six months or longer, and must be able to document a two year work history prior to an absence from employment.

If you have any questions, please feel free to contact John any time through email or by giving him a call at (512) 524-8310!