Divorced But Still Responsible for Your Former Spouse’s Mortgage? Go...

It’s common for a divorce decree to award the marital home to one spouse or the other, with the spouse who is keeping the home being ordered to continue the mortgage payments until the mortgage is fully paid.  However, this raises the question of whether the now “homeless” spouse can qualify for a mortgage to purchase a new home, even while that spouse continues to be liable for the mortgage payments on the former home.

Often, this problem is addressed in the divorce decree with a provision requiring the spouse who is keeping the home to refinance the entire mortgage within a  short time after the divorce.  Many times, though, the divorce decree is silent on this question, and the mortgage may remain an obligation for both spouses long after the divorce is finished.

The good news is that HUD Regulation 4155.1 4.C.2.f, which governs FHA mortgages, addresses this common scenario.  This regulation states that the contingent liability of the ex-spouse for the future payments due on the mortgage on the home now owned by the other spouse is not be counted if the loan was foreclosed.  The regulation reads as follows:

A borrower is generally not eligible for a new FHA-insured mortgage if, during the previous three years his/her previous principal residence or other real property was foreclosed, or he/she gave a deed-in-lieu of foreclosure.

Exception: The lender may grant an exception to the three-year requirement if the foreclosure was the result of documented extenuating circumstances that were beyond the control of the borrower, such as a serious illness or death of a wage earner, and the borrower has re-established good credit since the foreclosure.

Divorce is not considered an extenuating circumstance. An exception may, however, be granted where a borrower’s loan was current at the time of his/her divorce, the ex-spouse received the property, and the loan was later foreclosed.

Note: The inability to sell the property due to a job transfer or relocation to another area does not qualify as an extenuating circumstance.

Furthermore, HUD Regulation 4155.1 4.C.5.d provides as follows:

When a mortgage is assumed, contingent liabilities need not be considered if the originating lender of the mortgage being underwritten obtains, from the servicer of the assumed loan, a payment history showing that the mortgage has been current during the previous 12 months, or the value of the property, as established by an appraisal or the sales price on the HUD-1, Settlement Statement from the sale of the property, minus the upfront mortgage insurance premium (UFMIP), results in an loan-to-value (LTV) ratio of 75% or less.

TOTAL Scorecard Accept/Approve Recommendation

If the loan receives an Accept/Approve recommendation from the Technology Open To Approved Lenders (TOTAL) Scorecard, the lender must obtain either a copy of the divorce decree ordering the spouse to make payments, or the assumption agreement and deed showing transfer of title out of the borrower’s name.  (Note: a twelve month history is not required.)

This means that even where there has not been a foreclosure, the ex-spouse may not have the former home’s payment counted against him or her, for mortgage qualifying purposes, if the lender receives a copy of the divorce decree awarding the home to the other ex-spouse, and obligating the other ex-spouse to make the mortgage payments, and the lender correctly concludes that this amounts to an assumption of the mortgage.  This is good news for divorced persons who are in the market to buy a new home, and who need to qualify for a mortgage to finance that purchase.

Photo courtesy of RevDanCatt, http://www.flickr.com/photos/revdancatt/.