Divorce is a complex emotional and financial journey. For family law attorneys and their clients, navigating the intersection of divorce settlements and mortgage lending can be particularly tricky. Misunderstandings about mortgage underwriting rules can lead to settlement agreements that create major roadblocks for clients seeking to refinance or purchase a new home.

As a Certified Divorce Lending Professional (CDLP) in Metro Detroit, I’ve seen firsthand how crucial it is to get this right. Let’s break down the key areas you need to know to protect your clients’ financial future.

Understanding the Underwriter’s Lens: How Lenders See Divorcing Borrowers

When a client applies for a mortgage post-divorce, lenders are laser-focused on their ability to repay the loan. Here’s what they look at:

• Income Stability:
  • Lenders want consistent, stable, and verifiable income.
  • Spousal and child support can count, but only if structured correctly (more on that below!).
  • Frequent job changes, returning to the workforce after an absence, and self-employment transitions can delay approval.
• Debt-to-Income Ratio (DTI):
  • Monthly debt vs. income – affordability is key.
  • Too much marital debt = DTI issues.
• Credit & Liability:
  • Joint mortgages still count as your debt in the eyes of the mortgage servicer, even if the decree says otherwise. When applying for the new mortgage, any marital debt that appears on the credit report and has been assigned to another party via the decree is considered a contingent liability and removed from qualifying.
  • Ex-spouse’s missed payments has the potential to greatly damage your credit.
• Equity & Loan-to-Value (LTV):
  • Refinancing to buy out equity? Title vesting matters. If the refinancing spouse has not been on title for the 12 months prior to the new mortgage, it is considered a cash-out refinance, limiting LTV to 80%. It the refinancing spouse has been on title for the 12 months prior, LTV is increased to 95% and is no longer considered a cash-out refinance.
  • Cash-out refinances have higher interest rates than non-cash-out refinances.

The Top 5 Mortgage Mistakes in Divorce Settlements (and How to Fix Them)

1. Support Payments Gone Wrong:
   • The Problem: Support must be court-ordered, have 3+ months of payment history, and be expected for 3+ years after closing.
   • The Fix: Ensure support terms meet or exceed these guidelines.
2. Stuck on a Joint Mortgage:
   • The Problem: Leaving both names on the mortgage creates ongoing liability and your client’s credit profile will partially be dependent on the payment history of the ex-spouse until it is paid off.
   • The Fix: Require refinancing within a set timeframe.
3. Debt Overload:
   • The Problem: Assigning too much debt to one spouse kills their DTI.
   • The Fix: Balance debt division and consider pre-settlement debt payoff.
4. Handling a HELOC Headache:
   • The Problem: Many couples use HELOCs for home improvements or debt consolidation. During a divorce, simply assigning the debt to one party in the decree doesn’t release the other from liability. If the ex-spouse responsible for the payment and defaults, it negatively impacts the other’s credit and ability to obtain future financing. Furthermore, because HELOCs are secured by the property, it can complicate the process of transferring ownership or refinancing.
   • The Fix: Refinance or Pay Off: Ideally, require the HELOC to be refinanced into the name of the spouse retaining the property or paid off entirely before or shortly thereafter the divorce is finalized.
   • Account Closure: If refinancing or payoff isn’t immediately possible, ensure the HELOC account is closed to prevent further withdrawals.
5. Lack of Early Mortgage Planning:
   • The Problem: Many divorcing individuals and their attorneys focus on the immediate legal aspects of the divorce, neglecting to plan for the mortgage process until much later. This lack of early preparation can lead to: Settlement agreements that don’t align with mortgage underwriting guidelines. Missed opportunities to optimize financial positions for future mortgage applications. Unnecessary delays and stress during the mortgage approval process. Worst of all, financial surprises after the divorce is final.
   • The Fix: Divorce Mortgage Planning: Integrate divorce mortgage planning into the divorce process from the outset.
   • A CDLP can: Assess the client’s current financial situation and identify potential mortgage-related issues. Advise on how to structure the settlement agreement to maximize mortgage eligibility. Provide guidance on managing debt, credit, and income during the divorce. Help create a timeline for the mortgage application process. Provide information regarding how different settlement options will impact the ability to obtain a mortgage.

By getting a CDLP involved early, the divorcing client can avoid many of the pitfalls that occur when mortgage planning is left until the last minute.

Real-World Example: A Grand Rapids Success Story

A client wanted to keep her home, but her settlement had major flaws: short-term support, high DTI, and her ex still on the mortgage. As a CDLP, I worked with her attorney to:

• Extend spousal support terms.
• Restructure debt division.
• Add a refinancing clause.

Result? She refinanced successfully, and her ex moved on with a clean slate.

For Family Law Attorneys: Partner with a CDLP

Protect your clients’ financial futures by aligning settlements with mortgage rules. Let’s collaborate!

For Divorcing Clients: Your Homeownership Goals Matter!

Don’t let your divorce settlement derail your homeownership dreams. Contact me for a free consultation.