Divorce situations can sometimes be a sticky situation when trying to obtain mortgage financing. Could an FHA mortgage loan be a solution for you after divorce?
Traditionally, FHA mortgage loans are thought of as the best mortgage options for first time homebuyers. FHA mortgage loans have also been used for homebuyers who might be credit challenged or higher on their debt to income ratios. FHA loans may also be the answer for divorcing clients seeking mortgage financing as well.
FHA mortgage loans are known to allow a lower down payment and lower interest rates. The biggest negative for making use of the FHA insured mortgage loan for most homeowners and buyers is the required FHA mortgage insurance which can make the FHA loan undesirable. Why would a divorcing client with a substantial income or substantial equity in the marital home want to utilize FHA mortgage financing after their divorce? In some cases, it might be their only option.
Here are the top two reasons why an FHA loan might help your
divorcing clients obtain mortgage financing in the midst of divorce.
Frank was at the tail end of his divorce settlement and found the perfect home to purchase once his divorce was final. Perfect location close to his children’s school as well as his work commute. Frank had a solid career and a substantial salary along with a large down payment for the new home. Frank’s one obstacle to homeownership was that he would be paying his ex-wife 40% of his gross salary as maintenance. This put Frank at a 45% debt to income ratio straight out of the gate without even taking into consideration his new monthly housing payment on the new home.
Frank’s best option was to utilize an FHA mortgage in order to move forward with the purchase of his new home. Because alimony/maintenance is a tax deductible liability, FHA mortgage guidelines allow for the 40% maintenance Frank was paying every month to his ex-wife to be considered as a ‘reduction to income’ rather than as a liability which is counted against his income . What makes the difference?
The above chart shows us two scenarios for Frank. The first column shows us that if Frank’s ex-wife is receiving 40% of his income of $12,500 monthly, Frank would only qualify for a monthly housing expense of $625. However, using the benefit of an FHA insured mortgage that allows for the $5,000 paid in monthly maintenance to be a reduction to his income, Frank now afford a monthly housing payment of $3,375.
The drawback to Frank is that the FHA mortgage includes private mortgage insurance regardless as to whether he was putting a full 20% down payment down or not. Looking into the future, if Frank’s monthly maintenance payment was to end , he could always refinance out of the current FHA mortgage into a loan not requiring the mortgage insurance. In Frank’s current situation, utilizing this benefit of a FHA insured mortgage was his best and maybe only option in securing new mortgage financing to
purchase his new home.
Sharon was under contract to purchase a newly built home from a local builder. Originally, Sharon’s intent was to purchase the home as a cash buyer but due to certain events during her divorce process, she was forced to seek mortgage financing. Sharon’s only obstacle was income. Her only source of income was maintenance from the divorce.
Sharon’s divorce was finalized just two (2) weeks prior to the scheduled closing of her new home and she needed to document receipt of the awarded maintenance for six (6) months before it would be considered qualified income. Sharon was on the verge of losing not only her new home but the $50,000 she had put down on the home for upgrades.
Even though Sharon was in the position of putting a 50% down payment on the new home purchase, she was not able to qualify for conventional financing because she was unable to meet the documentation requirements for support income.
Conventional mortgage financing requires that in order to utilize income from support as qualifying income the borrower must be able to document six (6) months of receipt. FHA mortgage guidelines only require the documentation to show three (3) months of receipt.
Fortunately for Sharon, she had received temporary orders prior to the final divorce settlement three months prior. Sharon was able to document the receipt of the required income needed to qualify for her new mortgage utilizing the three month receipt guidelines for FHA insurance mortgages. Again just as in Frank’s situation, Sharon was required to carry FHA mortgage insurance on her new loan even though she put down a 50% down payment. However, once Sharon is able to document the required six (6) months receipt of support, she will be able to refinance her current FHA mortgage to a convention mortgage and eliminate the monthly mortgage insurance.
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice. To find a CDLP in your area, please click here.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.