Mortgage Options for the Family Centered Divorce
In this episode, we'll discuss different mortgage options for the family centered divorce. We'll discuss different mortgage options, loan assumptions, real estate market conditions, and whether a spouse can qualify as a first time home buyer. We'll also discuss the importance of planning early to keep your house, and how a divorce mediator will help you through the divorce process.
If you're contemplating how to plan for or respond to a divorce, be sure to listen to this episode first! For legal assistance or mediation services, contact us at (630) 891-2478 or at www.birtlaw.com.
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[00:00] Erin Birt: Welcome to the Restorative Divorce Podcast, where we focus on all things divorce and parenting related to help you find clarity, stay informed, and stay out of family court. With 20 plus years of family law experience, our attorney and mediator, Erin Birt has seen too many times how family court will negatively impact your health, your relationship with your kids, and your wallet. This podcast aims to turn that around and empower our listeners to take back control of their family law process and their lives by working with divorced professionals that seek to help and not hurt. Our goal is to provide you with expert tips that you can implement today to restore your finances, emotional well being and coparenting skills. Of course, our team at Birt Law is always here to customize a restorative divorce plan for you, but for now, listen to this episode to get help today.
[01:01] Erin Birt: Today we want to talk to you about divorce planning and incorporating some divorce professionals early on in your case. We're going to specifically cover current market trends in real estate and different mortgage products that are available to you when you are contemplating divorce or going through a divorce. Today I've invited my good friend Larry from Guaranteed Rate to come and share some great ideas with you.
[01:27] Larry LoVetere: Well, thank you Erin and Tyler for having me today. I appreciate it. It's great to be here. My name is Larry LoVetere and I'm a certified divorce lending professional CDLP. And I'm also a vice president of mortgage lending at Guaranteed Rate. And I focus my practice on helping divorcing clients. It's a specialty that I have and I take more of a holistic big picture approach to the process and looking at not only what their goals are for today, but what their goals are down the road. And I put an emphasis on being involved early on in the process so they can make sure that things are structured so that they have the most success post divorce.
[02:11] Erin Birt: And Larry, you and I started working together because we are, I believe, like minded professionals. And we both strive to have our clients be most informed, to learn all of their options early on so that if they need to change or if they need other options, we're able to pivot and we're able to still help them and meet them where they're at or improve their circumstances. And so that's something that I really value about you is that I think sometimes that scary unknown of divorce is “I'm going to lose this house. How am I going to survive without having my house that I have invested in or saved money for or made improvements to?” And they can think about losing other things, but the scariest thing I would say is losing your house or feeling that you have no options. And so somebody like you being able to come along and give them hope, give them options that they wouldn't have otherwise known about, and that many divorce litigators or divorce attorneys don't know about, it's an invaluable service.
Mortgage Options for the Family Centered Divorce: Fear of the Unknown
[03:25] Larry LoVetere: I think so and thank you for saying that. And I always refer to it as “fear of the unknown.” One of the things that I find in talking with clients who are going through a divorce is sometimes it won't even bring it up. But I'll introduce the topic. They're scared to death as to what the future is going to look like for them post divorce. They don't know if they can stay in the marital home, if they'll be able to afford to purchase a different home post divorce. And so one of the things I tell them, one of our very first conversations is “let's remove that fear of the unknown.”
I'll do an analysis and figure out what your options are going forward and then they feel a lot better. It's a stressful and traumatic time in their life, but at least they know that piece of it may have a successful outcome for them. And so it kind of ties into another thing that I put a great emphasis on and that's involving all the divorce professionals early on in the process.
So too often I see situations where I'm not contacted until after the divorce is final. And then, as I put it, I can only play with the cards we're dealt. But if I'm involved early on, we can identify what the options are that are available to the client, but more importantly, assist you in structuring that settlement agreement. Because the language in that settlement agreement can often conflict with the goals that the divorcing client hopes to achieve post divorce. And specifically, as it relates to what I do, it can conflict with mortgage lending guidelines and then we don't have that successful outcome that we were hoping for and you touched on it a minute ago.
We also want them to be able to make informed decisions as they go along. And a big piece of that is focusing on their real estate needs. Give you a quick example. I see this quite frequently. One spouse or the other is interested in retaining the marital home and they're going to be reliant on income sources like child support and maintenance to qualify for mortgage financing. But very often I'm contacted after the divorce is final. I look at the settlement agreement says must refinance the marital home within 90 days or you have to put the house on the market and sell it.
Well, there's this thing in the lending industry called the 636 rule. If I'm going to use child support maintenance to help the client qualify, I have to show six months proof of receipt of that maintenance before they can use it to qualify for mortgage financing. So I've only got 90 days, but we have to wait six months. The math doesn't work. And so that the client they're set up for failure. They haven't even gotten out of the gate yet.
So as a divorce professionals, if we're all working together, we can identify these things. We could do one or two things. So one of the things we could do is get a temporary court order to start the payment of that maintenance and child support so that by the time the divorce is final, we have six months of proof of receipt under our belt. We can move forward right away, or we can change the timeline in which we give the retaining spouse to refinance the mortgage. So involving the divorce professionals early on is so important because there's so many things that we could assist and make sure they have a successful outcome, and that includes tax professionals, financial planners. There's a designation within financial planning called Certified Divorce Financial. I'm not a tax accountant, and I don't play one on TV, so it's best to have one but I know enough to know that the client should speak to somebody who does know.
[07:22] Erin Birt: Right.
[07:23] Larry LoVetere: So it's important to involve the team early on, so we help the client get to the finish line successfully.
[07:32] Tyler Birt: For you, Larry - I think we see it in not most, but a lot of families that are going through a divorce that are separating, the marital home is the asset. And you have a lot of emotional attachment to your marital residence, especially if you have kids, depending on their age. But divorce attorneys and judges and everybody in the profession also realizes, here's our asset, how do we split it up? Right?
But people want to stay in the home, or one party wants to stay, one party wants to go. So I think from what you're saying, it can be very important on what you want to do, because the marital residence is a lot of times the sole asset of the marital estate. It's not like you can go out and use all your other assets to cover the expense. Having a home is a big asset. It's the biggest thing that most people ever have.
I think it's interesting to what you're saying about getting involved early and knowing options. And I think something that Erin is very good at with her clients is giving options and real expectation. It's easy to say, “yeah, we could do that” when maybe we can, but maybe not the way you're thinking of it.
Can Current Market Decisions Effect My Divorce Mortgage Options?
[09:21] Erin Birt: And maybe this would be a good time to talk about what things look like. What can people consider that are either considering divorce or in the divorce process? Larry, you were talking a little bit more about ‘we can help focus on the future by planning and pre planning', but maybe we could talk a little bit, from your expertise, about current market conditions and where are we at right now so people can maybe start thinking, “do I hold onto this house? Do I sell this house? What's available to me?” And I would think that current market conditions come into play when you're trying to consider your options.
[10:02] Larry LoVetere: Oh, for sure. Without a doubt. Right now, market conditions are probably the most difficult that we've seen in my career. These are the most difficult I've talked with, I've got coworkers that have been in the industry 30, 40 years that's going back away, and they've never seen conditions like these. Chicago Tribune had an article just the other day, and the headline was Spring Market Stalling. It's a very challenging time right now. Most people think the biggest contributing factor is the higher mortgage rates that we're seeing right now. I think an even bigger factor is what we call the lack of inventory. There's just a very short supply of homes for sale out there right now. In Naperville, for example, which is a community of 150,000 people that runs from I 88, East West all the way down into Will County. So it covers the entire length of DuPage County and half of another county. There are only 30 homes for sale right now.
[11:13] Erin Birt: Really?
[11:14] Tyler Birt: 30.
[11:15] Larry LoVetere: 30. So if you're planning to move to Naperville, I wish you the best. So that's how small the inventory is. There are buyers out there, not as many as there would normally be, but there's just not enough supply for the demand.
[11:31] Tyler Birt: So in regards to that, and it's something I've always thought about, because you hear a lot about inventory is low or inventory is high. So in your opinion, is that a function of people aren't selling because they can't afford or can't qualify for a new home? So they can't sell their home because they can't qualify for a new home.
[12:00] Larry LoVetere: That's a big part of it. So I put a couple of numbers together for today. So on a $300,000 loan amount, the payment on that mortgage today is going to be $557 higher than it would have been this time last year. That's a big chunk of the household budget. And so potential sellers, they're thinking, well, gosh, our current mortgage would get three and a quarter percent. Now we're going to double that interest rate. Home values have gone up 49% I'm sorry, 42% since 2019. So we've got higher purchase cost, higher interest rate we're borrowing the money at, and then you throw in inflation on everything else to go with it: Gas, groceries people are saying. And then the biggest thing I think is the fear of selling their current home and not being able to buy the next one if they want to do that, move up, buy, or even the downsizing, because there is so little inventory out there, they'll have no trouble selling their current home. The problem will be buying stay or where we are. And so those are all contributing factors.
And as it relates to a divorcing client, often the thought is, well, one spouse will retain the marital home, refinance the mortgage to remove the other spouse from the title and the mortgage to the house. But they're looking at it and saying, well, gosh, we have a three and a quarter percent interest rate now. We refi, we're doubling the interest rate. The payments higher. In some cases, the retaining spouse can't afford that new higher payment. And so some of them are starting to make decisions, you know what? We'll do nothing with the house right now and we'll wait until market conditions are more attractive for doing a refi. I can't tell you how many clients I've had have made that decision to simply do nothing for the time being.
Now, not everyone is willing to do that. Some people just they want to finalize things and be done. But some are making those decisions right now. Gosh, we can't. And even if their decision is to sell the marital home and each go off on their own and purchase their own properties, the same affordability issues are coming into play. And then we add to that the lack of rentals out there. So it's a challenging time.
[14:29] Erin Birt: It really is. And it seems that fortunately and unfortunately, it's making people think twice about divorcing or moving on. And so there is even in our area, kind of a delay or a shift in how people are approaching their divorce process: that fear of the unknown, inflation costs, not knowing what can be affordable to them, what products might be available to them. And so a lot of people are pivoting towards mediation, staying out of the court, maybe coming up with a separation agreement first, or at least having some guidelines for living under the same roof and then waiting for what they hope is that market conditions change and so that maybe then they divest of their house or other assets.
Larry, what would you say for a family that does not have the liberty to wait or for whatever reason they would like to move forward with their divorce now? What would you say are some of the options that they do have when living under the same roof is just not going to work? What kind of options do you think that they have to navigate these, what sounds like very significant challenges, they're facing?
Mortgage Options for the Family Centered Divorce: Loan Assumptions, First Time Homebuyer, Rate Buydown
[15:59] Larry LoVetere: Yes, and that's a really good question. So one of the things that is really a neat concept is the term assumption. And because of where rates are and so forth, now there is the opportunity for one party or the other, one spouse or the other, to assume the responsibility for making the current mortgage payment so they don't have to refinance the mortgage right now and then put the higher interest rate so they can assume there's two options for assumption.
One is called simple assumption, and the party that's going to be retaining the home can simply assume responsibility for making the payment each month. Downside to that is that does not absolve the other party, the other spouse from legal responsibility. So if spouse A doesn't make the mortgage payment, the lender can still go to spouse b for the payment. So in simple terms that's how simple assumption works to fix that.
You could do qualified assumption and as part of that process we would potentially be obtaining what's called a release of liability for spouse b so they're completely removed from any responsibility for the home. The challenges there are that the retaining spouse actually does have to qualify for mortgage financing. It's not just as simple as taking over the payments. They do have to qualify. Sometimes the lenders will require a 5% down payment, which sounds weird on where you're just assuming a mortgage. What's the down payment that's purchase financing? Well, they will often ask for 5% down and then the other thing to watch for is that they may agree to allowing one party or the other to assume the mortgage but not at the terms of the existing mortgage. So one of the things I would recommend is the client to provide a copy of the note, the deed and closing disclosure from their previous mortgage closing. And in there will be the language or one, whether or not lender will allow assumptions and then two, what their provisions are going to be. Are they going to want it? Because there's a term, so they're telling you right away, yes, we'll let you assume the mortgage, but we're going to want to bump up that rate to where the market is today, not the market rates that no longer exists. And as from a business perspective, I understand it from their perspective we would all like but that is one way of not having to refinance the mortgage and allowing the other spouse to not have a legal responsibility for it. So there's a couple of other things we can do. I'm sorry.
[19:02] Erin Birt: No, go ahead. Sorry.
[19:04] Larry LoVetere: That's okay. And then there's a couple of other neat programs available for folks. And this is a very little known thing in the industry. Normally if we were looking at first time home buyer, the definition of first time home buyers cannot have owned a home in the last three years. What is not well known in the industry is that a divorcing client actually qualifies as a first time home buyer.
Now that may not on the surface of things sound like a big deal, but first time home buyer programs have lower minimum down payments, lower interest rates, lower mortgage insurance and relaxed and or looser lending guidelines. It's easier to qualify for those programs than they are under regular lending guidelines. So it's a way of combating what we were just talking about in terms of market, little bit better interest rate than you would otherwise, less down payment money required.
And the reason that they qualify is there's a little known term in the Fannie Mae Freddie Mac guidelines called displaced homemaker. And as part of going through divorce, if the couple are going to sell the marital home, they're being displaced. So they fall under that provision so they can qualify for first time home buyer programs despite the fact that they actually own a home right now there's two qualifiers, though. They can't own any other property, so if they have an investment property or a second home that qualify, if they inherited a home from their parents, or if they were added the title to another property, for some reason, that will knock them out of the box.
And then even in a circumstance where they don't sell the marital home, one spouse retains the marital residence, but the other spouse leaves. I call it the vacating spouse. The vacating spouse will qualify for a first time home buyer status because, again, he or she is being displaced. So that's kind of a neat option right now. Help combat some of the market conditions and very not very well known at all in the mortgage industry.
Another thing we're doing is rate buy down programs. So interest rate buy down. So you can literally buy down your interest rate. There's some additional closing costs involved, but you can go from a six and a half percent rate to maybe as low as five and a half, depending on how much money you have to work with to buy down the rate. And another neat thing is, in a lot of circumstances now, we can get the cost for the buy down from the seller. Sellers want to cooperate and secure a good buyer for their home, and sometimes they're willing to help with the costs associated with doing that. That's interesting.
[22:05] Erin Birt: Yeah, these are definitely things that divorce attorneys usually are not educated on. Having an interest rate buy down, knowing that perhaps the parties might qualify as a first time home buyer, and then some of these loan assumption options that you were talking about, these are all the details and all the reasons why bringing somebody like you, Larry, in early is very important. Because as a divorce attorney, my goal is to divide and assign assets, not necessarily to know how best you can move on or retain an asset. And so having somebody like you early on be able to talk about these things, it's not that the attorney is committing malpractice, they're doing their job, they are getting you divorced and they are allocating dividing or selling assets, but that doesn't have to be the end result. And if you want to restore what you feel you've lost, if you want to be able to keep your home or you want to live close by or in a quality area, there are options out there.
[23:18] Larry LoVetere: That's right, there are.
[23:19] Erin Birt: So this is great information for people in a divorce contemplating a divorce to know that your divorce attorney is not going to talk to you about it, likely. But having somebody like you Larry, early on, you're giving people hope and options.
[23:37] Larry LoVetere: And you're delivering a valuable service to the client and trying to help them have the best outcome possible as it relates to the divorce.
[23:47] Erin Birt: Larry, if we could, we've got maybe about five more minutes here and I'm sure this does not give this next topic any justice, but do you think maybe you could talk a little bit about title issues and how that is complicated here in the divorce process and things that our listeners should be aware of.
Mortgage Options for the Family Centered Divorce: Title Issues
[24:08] Larry LoVetere: This is a huge topic, thank you for bringing it up. And it kind of ties back to what we were talking about involving the divorce professionals early on in the process. So title plays a huge role in what options are available to the divorcing client going forward. So we've touched on a couple of different times, the game plan of one spouse retaining the marital home and then refinancing the mortgage. And often they also need to take equity out of the house to compensate the other spouse for their share of the equity in the marital home. And the way I approach it is I do a process called an equity buyout rate term refinance. And that's important because almost everybody in the industry actually does this as a cash out refi. Cash out refi comes with an interest rate that's three quarters of a point higher than the rate would be on a rate in term, and you cannot access as much of the equity. That could be a factor where you are not able to get enough equity out, fully compensate the other spouse. And now you have to start looking at giving them other assets and sometimes there aren't any. You touched on it earlier, Tyler, and then often the house is it. So it's the asset, the only asset they have so that can be addressed early on in the process. When we look at title, title plays a role in whether or not they can qualify for an equity buyout rate. And term lending guidelines require that the borrower be on Title for twelve months before we can move forward with an equity buyout rate and term refi. So if I'm involved early and we decide that that's the goal, retain the marital home, but we're going to need to refi and we need to take equity out to give to the spouse. And the retaining spouse is not on Title, then my recommendation is we need to add them to Title as soon as possible, so we start the clock on that twelve months. Otherwise then the options are very limited in terms of what we can do.
So the next best option is you add them to Title post divorce decree and then we'd have to wait six months before you could do a conventional cash out refi. Again, not as attractive as a rate in term, but at least you can get the money out. But not everybody can wait that long. And an FHA cash out is twelve months on Title. So the sooner we start the clock on being on Title, the sooner we have additional options available to us.
Often, and it doesn't sound like that most people seem to have this in their mind that, oh, if it was a husband and wife that bought a marital home, they're both on the mortgage and they're both on the title. No, not necessarily. In fact, very frequently it was only one spouse or the other who went on the mortgage documents for a variety of reasons. Credit, it could be a lot of things, and it's the retaining spouse naturally, who's the one who's not currently on Title. And so then it creates issues. But again, if we identify what the goals are early on, we can identify the steps we need to take so that we can make that happen for them. Once the divorce is final. And Title is a huge one, everybody thinks, oh, I'm not on the mortgage. Is that going to be a problem? Being on the mortgage is not an issue. It's the title that counts.
Mortgage Options for the Family Centered Divorce: Start Early with Divorce Mediation
[27:49] Erin Birt: Absolutely. Larry, throughout this conversation today, I heard a lot of times that we should pay attention to six months, twelve months, and I think that really drives home that we need to work on these issues early. An average mediated case for divorce can be three to six months. So people should be talking about that almost in their first mediation session. The average divorce in a courtroom setting is twelve to 18 plus months. And so, again, you can easily, if you start doing this early enough and plan early enough, you can qualify for some of these programs or products that are for six months or for twelve months. But we've all got to start early. The divorce professionals need to start early and work together collaboratively. The parties should be aware and made aware. Let's work early on this, because again, I kept hearing over and over again, six months, twelve months, and that speaks volumes. Time is not on your side, even though emotionally, you want your divorce done as soon as possible. But if we look at average durations of divorce processes, whether that's out of court or in court, if you start this early, you have a better chance of success. You have a better chance of utilizing some of these great things that you bring up, Larry, that can help them move forward in a much better fashion than if they wait until they get a boilerplate divorce document that says you got 90 days to refinance or sell. And that's what most people have.
Larry LoVetere: Yes, exactly. And good luck figure that out on your own.
Erin Birt: And apparently, they can't figure that out because we haven't given them enough time.
[29:41] Larry LoVetere: Yes.
[29:42] Erin Birt: Well, Larry, thank you so much for being with us today. I really appreciate it. I know my clients, or potential clients, really will appreciate it. We'll have you back at another episode so that we can talk more hopefully those market conditions will improve the next time we talk, but it's always good to know, regardless of what current market conditions are, there are options out there. We've got to start early. We've got to bring professionals, divorce professionals and mortgage professionals together much earlier on in the process, and we can together, help families move forward.
[30:19] Larry LoVetere: Yes, absolutely.
[30:21] Erin Birt: All right.
[30:21] Larry LoVetere: That was a very good summary. Exactly. Well, thank you, Erin and Tyler, for having me today. I really appreciate it. It was my pleasure to be here.
[30:30] Erin Birt: Yes, always a pleasure to speak with you, Larry. And we'll invite you back here in the near future to talk about some more housing issues for divorcing or contemplating divorcing families. So thanks for joining us. Until next week. Be well.
[30:45] Larry LoVetere: You're welcome. You, too. Thank you. Bye bye.
[30:48] Tyler Birt: Bye.
[30:53] Erin Birt: Thanks for listening to the Restorative Divorce podcast with your hosts, attorney and mediator, Erin Birt, and our paralegal, Tyler Birt. A special thanks to our contributors and to the authors of the many articles that inspire us and keep our clients informed. We hope you enjoyed our deep dive into the separation, divorce or parenting tips covered today that you can use now to help restore yourself. If you strive to improve your life or the lives of your children after a separation or divorce, join us next week when we will cover more Restorative Divorce topics. You can head over to Burtlaw.com to get the podcast transcripts, follow us on social media, and even find more valuable family law information, all for your benefit. Get help today and work with us one on one. Contact us to set up a consultation or planning session to start rebuilding your life today. Enjoy this day and we'll see you next time.
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