Residential Mortgage Lender and Certified Divorce Lending Professional, Katie Walsh, talks through the relationship between divorce and mortgages, and important timetables and tips to be aware of.
Katie and Steve discuss the following in this episode:
• Challenges that a divorce brings to refinancing your home loan or getting a new mortgage.
• Tips for how to improve your ability to qualify for a mortgage during a divorce.
• Contemplating a divorce: what the best (and worst) times are to get your mortgage done.
• How a divorce can affect primary factors that affect you qualifying for a mortgage
• Why it’s important to protect your credit in a divorce.
• What the Debt-to-Income Ratio (DTI) is and how it is affected by your divorce decree.
• How spousal and child support fit into the mortgage equation.
• Deciding how to handle an existing mortgage in a divorce.
If you would like to speak with one of our family law attorneys, please call our office at (503) 227-0200 or visit our website at https://www.landerholmlaw.com/
For more information about Katie Walsh and how she can be a resource for you, you can contact her via http://cedaroakfinance.com/
Disclaimer: Nothing in this communication is intended to provide legal advice nor does it constitute a client-attorney relationship,
Welcome to Modern Family Matters, a podcast devoted to exploring family law topics that matter most to you. Covering a wide range of legal, personal, and family law matters, with expert analysis from skilled attorneys and professional guests, we hope that our podcast provides answers, clarity, and guidance towards a better tomorrow for you and your family. Here's your host, Steve Altishin.
Steve Altishin 0:31
Hi, everyone. I'm Steve Altishin, Director of Client Partnerships here at Landerholm Family Law. And today I'm here with Katie Walsh, a mortgage banker and certified divorce lending professional. She's here with us today to talk about what you need to know about home loans, mortgages and divorce. Hey, Katie, how you doing? Can you tell us a little bit about yourself?
Katie Walsh 0:53
Hi Steve, I'm doing great. Thank you. My name, as Steve says, is Katie Walsh, and I am an Oregonian through and through, and have been in the lending business for about 15 years. And specialize oftentimes working with those who are going through major life changes, like a a divorce.
Steve Altishin 1:18
Well, that's why we're here. So let's start it. Home loans, mortgages, divorces-- these are things that don't necessarily play well together. I mean, these are oil and water kind of things. And so I can imagine that a divorce can create a lot of challenging situations when it comes to dealing with your existing mortgage, trying to get a new mortgage, trying to refinance a mortgage. Can you just kind of talk to us a little bit through that?
Katie Walsh 1:50
Yeah, so absolutely, there is that big piece of real estate that oftentimes is one of the biggest pieces of a divorce. Going through how much equity is in the property, who is staying in the home. Whenever possible, I love meeting with both parties, to have everything be transparent and calm, and really just set the groundwork for how it all comes together, and how the wording in the dissolution of marriage actually impacts directly the interest rate and how the loan is structured. So being able to go through those details and work with attorneys and mediators so we're all on the same page just makes the whole process a little bit easier on our clients.
Steve Altishin 2:42
I imagine. So let's talk a little bit about that in a little detail, the primary issues that you would talk about when we start talking about it. What are the main factors, the issues, that you're going to discuss with folks?
Katie Walsh 2:59
Yeah, the main two pieces of the puzzle are really about that equity payout for the departing spouse, as well as income that's being considered through spousal support or child support. So oftentimes, when someone is looking to have equity taken out of property, they go to a lender and say, 'I want to cash out refinance'. And the term 'cash out' truly means you're going to pay more money, because it's considered higher risk to to an investor. So with taking equity, there are two scenarios where you can utilize equity and maintain a lower interest rate, which would be considered a 'rate and term refinance'. And those two scenarios are divorce, and paying off student loans. So it could be, you know, three eighths to a half percent lower interest rate when you work on having the dissolution of marriage with the exact wording that you need for that equity payout. So those are both critical pieces. The income and having child support or spousal support, it's important to know that it needs to continue for three years from the time of application. So if there are children, for example, 16, 14 and 12, then we're going to look at, for that 18 year old, is that child support going to continue? Excuse me, the 16 year old, will it continue when they're 18, or will it ultimately be changing that dollar amoun?. But the rule of thumb is that for any income to be used, it needs to have a three year continuance.
Steve Altishin 4:46
Oh, I think people get confused there. That's good to know, because I hear a lot of times people said, 'Well, I have to had spousal support already for three years before I can get a mortgage refinance or anything.'
Katie Walsh 5:00
Yeah, so it depends on the structure of the loan, if it's a conventional loan or a government loan, but yes, there also needs to be receipt of those funds prior to starting on the refinance. Six months is ideal. There are some scenarios where it can be three months of receipt. But at that point, there needs to be documentation actually filed with the court, even if it's prior to the dissolution, that reflects what that payment is going to be.
Steve Altishin 5:31
Is that something that can be done prior to the divorce final judgment?
Katie Walsh 5:38
Yeah, it can. So there can be just a simple filing that shows that here is the amount that is going to be awarded. Even if that amount changes, it can still count towards that clock starting on receiving those funds.
Steve Altishin 5:55
So that's a couple of times now that you've said the clock starting. It sounds like that is kind of important, because I guess when I think of the divorce, I think of, well, there's before the actual divorce, during the divorce, and then after the divorce, and they probably all three have different challenges or opportunities.
Katie Walsh 6:13
Yeah, absolutely. So anytime an underwriter is reviewing that piece of income, to have receipt and to have the continuance, are really important pieces of that puzzle. This is why I encourage people who may be just at the beginning of the process, that we start those conversations, even if it means that nothing's happening with the financing for several months. It's important to have those conversations early in the process.
Steve Altishin 6:42
Got it. There's a term that I hear, and it took me a while to figure out what it was. And I know a lot of people get kind of confused because you talk about income and talk about things you owe, but there's this thing called a debt to income ratio. And I have a feeling it's fairly important, and divorce can do fairly weird things with it.
Katie Walsh 7:06
Absolutely. So in a case where you may have somebody who hasn't been working, and suddenly they're in a position to need to take care of a family or take care of themselves, and are kind of starting over, that can be a pretty scary scenario. And I've been through that and was a single mom for six years. And it is a huge consideration. So sometimes people look at qualifying for a home, but then they kind of forget what's needed or don't have that information. And instead, they will take a payout from the ex spouse and have one chunk of money versus having monthly installments. And what that does is it allows for funds for downpayment, but it's not giving that monthly income which a person would need to be able to qualify. So that debt to income piece is huge. And it can be anywhere from 43% being the highest amount, we have some loans where you can go even above 50% debt to income. That's another reason why going through that data and going through numbers with a lender is critical prior to having the divorce finalized.
So this kind of stuff you want to talk about, like you said, even before potential negotiations start between the lawyer.
Absolutely. And I think having the lawyers involved with that and understanding that piece, and just realizing that this is another element and how we do this absolutely impacts both clients. It's an important piece. I've talked to clients and met with people a year before they even start the refinance. That refinance is critical for removing the departing spouse from title and from the mortgage. That's another key ingredient is that you don't want, or often don't want to have that financial obligation for someone that is not your spouse.
Steve Altishin 9:17
That makes sense. So does the mere fact that you have filed, and/or it's not reached a judgment, is that a no man's land?
Katie Walsh 9:33
Great question. So when there's that first filing and a case number's given, that will be found by the lender, so we've had--
Steve Altishin 9:44
Everything is found by the lender!
Katie Walsh 9:46
Yeah. Of course, there are people that are like, Hey, we don't want to wait, we just want the money, you know, etc. If we don't have the court filed, stamped, signed by the judge dissolution, then we can't close on the loan. So for attempting to do that without the dissolution, it's either going to increase the interest rate or make the process longer. In short, always be honest with your lender on what you're trying to do.
Steve Altishin 10:20
Does it matter, or is there a change that occurs with the lender, if you've started the process, you're into the process, you may be well into the process, and then you file?
Katie Walsh 10:33
No. In fact, oftentimes, that is exactly what we want to do. So for example, I have a client right now where we have the loan completely done. So we have the appraisal done, all the title work is done, underwriting, everything. And we were just waiting for that court filed stamped copy of the dissolution. And now we can get the loan done and closed within the next two weeks. So you can be really proactive, we just always want to make sure that we're paying attention to if an appraisal is needed, how long that appraisal is good for, and be strategic with that information as well.
Steve Altishin 11:13
And I'm assuming, maybe I shouldn't assume, that that is the same issues, whether you're getting a new mortgage, you're even refinancing a mortgage, you're trying to get one person taken off of a mortgage?
Katie Walsh 11:27
Steve Altishin 11:29
The issues of, we didn't talk about this, but credit rating. I know that it becomes an issue in divorce, just in general. And kind of especially when someone maybe let's anger kind of take over and hurt this other person by not paying this bill. Can this kind of stuff affect your mortgage?
Katie Walsh 11:58
Oh, absolutely. And I've I've seen it happen where somebody didn't remove the spouse from the mortgage and just destroyed credit. So anytime you have two people on a mortgage, again, the only way to remove a person from a mortgage is unfortunately going through that refinance process. But it also is protecting everybody. Should there be hurt feelings and emotional reactions, impacting your credit is huge. So we do a comprehensive credit analysis. So when people have money, and they start thinking about paying off debts, even in that case, as invasive as it seems, I still tell people hold off on paying off anything, because you could actually hurt your credit if you go and pay off absolutely everything, car loans, etc. So we try to be strategic with what's paid down if we need to help increase the credit score to have better pricing. We want the time and the details on how to do that.
Steve Altishin 13:11
So there's a sweet spot there?
Katie Walsh 13:13
Absolutely, yes. With credit, the rule of thumb is to always try to be above 740. In some loan scenarios, being above 760 gives you better pricing. And with every 20 point increment, you're going to have a change in pricing as that number goes down. So a 720, 700. So for somebody, for example, who is at a 680 credit score, my first goal is going to be to get above 700. If I can get above 720, I want to be able to work on that. You'll see pricing improvements with every 20 points up to 740.
Steve Altishin 13:55
And these are things that can be done even while the divorce is ongoing?
Katie Walsh 13:59
Steve Altishin 14:03
Does divorce, just the status of being in a divorce, have a credit rating?
Katie Walsh 14:11
That's a great question without an easy answer. The quick answer is no, that your status as a married or non married person, that would be considered discriminatory for your credit score to change just based on that piece of information. But what we do see is if there are, for example, auto loans, or all the credit cards are in one person's name, and then they're completely removed from another, we just want to pay attention to that credit history and what's actually showing up on credit. The algorithm for credit scores is not an exact science. Unfortunately, they're pretty skilled at not letting us know that exact algorithm. The rule of thumb that we've been able to see is that having a mortgage, one car loan, and one or two credit cards that are paid responsibly, that's kind of the special, sweet spot for really good credit.
Steve Altishin 15:10
What if one of the spouses is significantly more financially well off, you know, is the income producer? Do they ever come to you and say, 'Well, let's just not tell anybody about a divorce and run it all through me', kind of a thing?
Katie Walsh 15:28
Absolutely. So if somebody comes to me, and they are just trying to get equity out of a home, that is a whole separate thing. The moment that a divorce is mentioned, especially if there are kids involved, that is going to be a screeching halt. Because then you're going into fraud territory, because, again, especially when there are children involved, investors, underwriters, they want to see if any support is being paid. And by wanting to see it, that means I want a legal document that is signed by a judge. And that truly is the piece that's going to be needed in that scenario. But yeah, somebody trying to do it all on their own. And hey, I haven't filed, I just want to take a bunch of equity out, that would be a cash out refinance, higher interest rate. And it has happened, I mean, you know, you find out somebody does that. And a year later, they're divorced. So that can still ethically occur. But if somebody is intending to do something, knowing that their financial situation is going to change, that is when you're getting into that gray area that we stay out of.
Steve Altishin 16:48
No, that makes sense. Yeah, yeah. So a lot of what we talked about revolves around an existing house, an existing mortgage. But I know you've said that some of it applies also, potentially, to new mortgages. Are there any new mortgage--let's say, you know, there's a divorce happening and someone wants to go buy a house, they just want to get a new house, and they're going to get a new loan. What kind of things are you going to tell them?
Katie Walsh 17:21
So pretty much the same information that we need to do the same qualification, we need to have the divorce finalized, we need to be able to source where funds are coming from for downpayment and make sure that the income is continuous. And it's really your typical process for purchasing a home that you would go through, just like a refinance.
Steve Altishin 17:44
What about the ex spouse who doesn't have as high of an income, maybe less credit, just simply less credit, but not necessarily a bad score. And they come to you, and they say, 'Okay, now we're divorced, or we're about to get divorced, what do I do? How do I get myself in a position to potentially be able to buy a house?'
Katie Walsh 18:07
Yeah, so that is a conversation I always love to have in person, because you're really sitting down with somebody and planning their future, and where do they want to be? What kind of house do they want? What's the monthly payment that's comfortable? And then we start piecing together what that would look like. And if they haven't been working and they need to go back to work, what does that look like? I've had clients that don't work and haven't worked and then want to go back and work 10 hours a week. And in that scenario, we have to have a pretty extensive history of that income in order to use it towards that debt to income piece. So then we have the conversation about any spousal support or child support, we talk about the potential of adding a non occupant co-borrower, which means, you know, if you have a family member, for example, that could assist and be a co-borrower on the loan. That is a pretty typical scenario for a lot of people that don't have that income or work history. But really, again, it's looking at all of those pieces, talking about every potential outcome and how to get there, and just being available to talk that through because, as a lot of us know, it's a stressful situation at times and I think having a pit crew of people is critical.
Steve Altishin 19:37
I know this comes on not just the lawyers side, but the therapist side sometimes, is the idea of working--even though you're getting divorced, even though you don't agree with pretty much anything these days--and coming together on an issue like this. You know, if you're going to try to refinance, or you're trying to get a mortgage, you really have to work together.
Katie Walsh 20:04
Yeah, absolutely. And it goes without saying, but I think anytime, especially when there are kids involved, that's where the sensitivity just kind of goes up a notch, if somebody really wants to stay in the house, and it's for the kids. But you know, again, anytime it's possible, it is great to be able to have that conversation with both spouses, both the person staying in the home and the departing. I've had more and more cases like that, where I've had two people who are getting along, I'm talking to both of them through the process, everything is out in the open. So I'm seeing that a lot more lately, which is fantastic. And any time that there can be that open, honest dialogue, everything is better, especially for the kids.
Steve Altishin 20:59
Do you ever see where maybe a divorcing couple says--either because of the financial situation of the economy, or their particular interest in a property--that they want to continue on the mortgage together? Is that something they can do?
Katie Walsh 21:22
It's such a great question. I have seen this a few times over the last year, where the couple wants to stay married, but they want to have two separate homes. But unfortunately, our friends at Fannie and Freddie are not hip yet to these different scenarios. So what it means to investors is that you can't have two primary home mortgages. And now, Fannie and Freddie have also increased interest rates for second homes. So if somebody wanted to buy a home, you know, in government camp, it'd be considered a second home, which is going to hike up that rate. But yes, there have been scenarios where people are looking for alternative ways to make that work. And we, again, discuss all of those details, and how that can be a financial win for everybody involved, and low risk is the other piece of that.
Steve Altishin 22:24
So if one of the couples is going to live in the house, I mean, just a typical scenario, one stays in the house, at least until the kids are grown. The other one doesn't stay in the house, but is making the mortgage payments. How does that work then, if that person says, 'Hey, there's some better rates, I want to refinance, but I don't think I'm considered the primary home anymore.'
Katie Walsh 22:53
That's a great question. So in a scenario like that, it is still going to be a primary home, because of the person that's in the home. So if you have, um, it would still be technically a non-occupant co-borrower. But in that scenario, the person that's in the home is still on that mortgage. So it's still considered a primary home loan. And then, when that happens, there's always a risk associated with that anytime you have finances still legally binding with two people that are no longer married. There's a lot of trust that is going into that, and at times that can go the wrong direction. So in scenarios like that, I always suggest to couples having a plan to not have that be the case at some point in the future. And just making sure that we're working with the attorney or the mediator on checking in, you know, every so often, "Is this working is? Is everybody holding their end of the deal and making sure those payments are being made?'
Steve Altishin 24:11
This came to my head, another question here, on the assets, like you're talking about. So let's say I come in to you, and we're near the end, we have a potential split of assets, we have a potential split of debts. And I come and I say, 'Well, here are the assets I'm getting, here are the assets they're getting, here are the debts'. Do you look at those and I mean, is there a better asset, just in terms of, not a value but of what it is, or a better debt, and you say, 'Well, hold it, don't take that one'?
Katie Walsh 24:50
Yeah, no, that's an outstanding question. So assets, all great. As far as what kind of asset and where that money is held and how it impacts the mortgage, it does become a consideration. So for example, if I am in my 60s, and I haven't been working, but I'm going to have a significant amount of money in an investment account, I could start taking a draw from that investment account and use that as monthly income towards my debt to income ratio. So in a scenario like that, that's critical. Because you would be able to adjust that number for what you need to qualify for a home, given that there is enough funds for a three year continuance. So somebody that is not a retirement age, that's not an option. And so again, you're looking at those assets coming in. And we're looking at the whole piece with credit, with the income, and with the assets. So somebody wanting to pay off a bunch of debt, and we're working on improving a credit score, that is, again, where I say, please don't do anything, because paying off a car loan, for example, could end up hurting credit, whereas lowering balances on credit cards will help increase credit.
Steve Altishin 26:21
Wow, this is this is a tight rope.
Katie Walsh 26:27
Yeah, yeah, isn't it fun?! I love my job. It is fun to provide information. I would love the complaint to be, ugh, Katie gave us too much data!
Steve Altishin 26:41
That's my kind of person. So is cash not necessarily King? Isn't always better? I hear, 'Well I'm just gonna take the cash, because cash is cash.'
Katie Walsh 27:00
So, I always have to, anytime someone uses the C word in lending, we all have to give our disclaimer that cash can never be the green stuff. If somebody has $100,000 sitting in a safe at home, I cannot use that. It would need to be put into an account and be sitting there for a few months to be able to use those funds. So we lenders always have to use that disclaimer. Having a large payout, for some people, that could be a great thing that could help somebody put a significant down payment on a home or invest or, you know, plan for their retirement and future, whatever they need. For other people who need that monthly income to qualify to buy a house, that's not the right answer. We want to see more support payments spread out at least three years, so that they can qualify and have their money each month not going to rent, and going towards equity.
Steve Altishin 28:03
That just kind of made me think of something else, which these things do. You know, there's a ton of different kinds of loans. And they all have different letters. And they all have different very quaint names like Fannie Mae and Freddie Mac. And the big one that always seems to twist everybody around is the jumbo loan. Does that differ, or are they all treated the same in a divorce? The type of loan, does that sometimes become an issue in your divorce?
Katie Walsh 28:42
It absolutely can. So jumbo loans have kind of been through the wringer since COVID came in. We had a period of time where they were just not available. Or if they were available, they were so expensive, they did not make financial sense. So we're starting to come back, we have jumbo loans available again. But what ends up happening with those is if you have a loan amount that is over that 548 to 50 amount, then the requirements for reserves changes. So you could have a loan for 600,000, and depending on the investor, we could need to have six months of payments--principal, interest, taxes, and insurance--we could have to have that set aside. It can be an investment account, but it has to be an accessible account. And basically what the lender's wanting to see is that, in the event that a person had financial hardship, they would have funds available to cover their payment. Loans over a million, that can go up to 12 months of reserves that are required. So the short answer is yes, absolutely, a jumbo loan is going to have more requirements for those reserves.
Steve Altishin 30:00
We've been talking a lot about people who want to get loans and who want to refinance loans. Divorces also have a significant percentage of people who want to get off of a loan. Who want to get rid of their mortgage. Are we looking at the same sort of, in reverse, things? Or what if someone comes in and says, 'I want to get off this loan, what do I do?'
Katie Walsh 30:28
Yeah, so if the departing spouse--so you're gonna have one of two scenarios. Either somebody's staying in the home, or they're selling and splitting and going their own individual way. And so for that person that wants to come off of the loan, off of title, that's the refinance process if someone's staying in the home. And to each their own, I've seen couples where they are best friends and raising kids and want to do it their own way. And I support that the majority of the time. It makes the most sense to keep things calm and happy to have no debts connected between the two divorced clients. Having somebody be completely removed from any loans of any kind, any liens, any car title, anything. But separating all of that tends to make life a little easier, making divorce life a little easier.
Steve Altishin 31:38
And a divorce--and I know this sounds like a dumb question, but actually, I've been asked this-- getting divorced isn't a default key or somehow a violation of your mortgage, is it?
Katie Walsh 31:51
So, say that, again.
Steve Altishin 31:55
Let's say we're both on, we're together, we're married, we're getting divorced. That doesn't trigger some magic button where they can raise the rates or anything like that?
Katie Walsh 32:06
No, absolutely not. That would be a massively fraudulent activity for any investor to do that. Oh, my gosh, yeah. Folks are protected under the Equal Credit Opportunity Act.
Steve Altishin 32:22
So, before we go, we're about to wrap up, but just a little bit of talk about today. In this environment, a lot of things can be a little bit wonky, obviously. Anyone who's been dipping their toe in the market, either has it getting crushed, or, you know, growing a new toe. There have to be not only challenges, but maybe opportunities right now. It's a great time to sell, let's get divorced!
Katie Walsh 33:01
That would be an interesting scenario! This market is crazy. And any real estate professional or lender would tell you, everyone's working seven days a week right now and really working hard. This market, when it comes to a divorce, the big question is, what is our value? There are two values, and depending on who you are in the divorce situation, it really impacts what's going to happen with those numbers. One value is when an appraiser is going to come in and look at comps, look at the home, and determine the value of that house. So if a lender is looking at value, that is what they are using. Somebody who may be wanting more equity out of the house could say, yeah, that's the value. But if we listed the house, we would sell it for absolutely over value, which is often the case right now. So then taking that information into consideration, it's an important conversation. But with that, then you need to talk about the costs associated with fixing up the property to be ready to sell. You're paying the commission's to those realtors that are working hard for you, you're paying some of the closing costs. So then you need to take all of those pieces into consideration as well to find that fair amount. And this is where realtors can get involved as well. There are people who absolutely specialize in these scenarios. So having that open dialogue, again, including the lawyer or mediator is another important piece.
Steve Altishin 34:48
Thank you very much. This has just been my pleasure, this is a tremendous learning experience. Before I let you go, any final tips? Any final words of wisdom down from the mountain?
Katie Walsh 35:06
Truthfully, I'm a gut person. I think that people should never be afraid to have conversations with lenders. You're not being charged for time, you're not going to receive a bill for sitting down and having a chat. That's just not how our compensation works. So it's an element that is part of that divorce. And it's important to know your options and to start those conversations early. That's my biggest piece of advice, is having those open discussions.
Steve Altishin 35:42
Yep. And from everything you've said, it really is the earlier the better in this case.
Katie Walsh 35:48
Steve Altishin 35:50
Wow. Well, again, thank you, Katie. Thank you for being here today and taking your time to share your expertise. I really appreciate it. And for anyone else here, thank you for joining us today. If you have any questions as always, you can post them or you can shoot me an email at [email protected], and we can try to get you connected with Katie, and she will be able to help. So until next time, everyone, stay safe. Stay healthy. Have a great day. Cheers. Thanks.
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