Modern Divorce - The Do-Over For A Better You

Mortgage Hacks For Divorcing Adults

February 24, 2022 Attorney Billie Tarascio Season 3 Episode 27
Modern Divorce - The Do-Over For A Better You
Mortgage Hacks For Divorcing Adults
Show Notes Transcript

We've all heard about exploding rental costs in 2022, so buying a home, even in a rising market, may be the best way to lock in dependable payments that don't rise with inflation and build equity for the long term. 

But how do you finagle a mortgage when you're divorcing and splitting up assets?

Enter Alex Shelton of Academy Mortgage, who explains some of the key insider knowledge to help you survive the financial spanking that might otherwise lock you out of buying a new house as a single person. In today's episode, Alex talks with Modern Divorce Host and Family Law Attorney Billie Tarascio about how to navigate a mortgage after a divorce. You'll learn what FICO score you'll need for a conventional mortgage, and even some unconventional options that may get you that new place to live.

Billie Tarascio: [00:00:00] Hello, it's Billie Tarascio with the Modern Divorce podcast. Welcome back to the show today. I've got a great show for you. Something that comes up every single day and is on a lot of people's minds, how to deal with their mortgage and refinancing and transferring ownership when you are facing a divorce or even after.

And we've got a great guest with us here today, Alex Shelton of academy mortgage, who has been in the business for nine years and really specializes in this area of [00:01:00] mortgages. So welcome to the show. thank you Billie, 

Alex Shelton: I'm excited to be here. 

Billie Tarascio: How you doing today? 

Alex Shelton: Doing fantastic. 

Billie Tarascio: Good. Good. I love the name Alex. Thank you. Thank you.

Alex Shelton: Yeah, it's a family name. Ben handed down a little bit. Actually the middle name, my middle name is Earl. Like the show. Yeah. And that's been handed down since my grandfather, his grandfather. Fantastic. 

Billie Tarascio: I've got a son named Alex and a brother name, Alex. It's a great name. That's a great name. So, um, we are going to talk about mortgages.

Most of the time, many, many times the biggest asset that a couple is figuring out how to divide is their home. And then they've got the fact that one of them. Wants to live there or both of them want to live there. So let's start with, um, when should people start talking to you? 

Alex Shelton: I think this sooner, the better Billie, because as you know, divorce, [00:02:00] and especially as it relates to mortgage, it's really a war of words.

So how the settlement agreement is spelled out. Maybe okay. For the settlement and what the couple wants to do as far as moving forward with their relationship, but it may not necessarily work when it comes to the mortgage guidelines and how those are spelled out. So it's important. The sooner we, I get, get involved along with all the other people involved with their financial planning, the smoother it will be to ensure everything's set up correctly from the beginning.

Billie Tarascio: Yeah, that makes so much sense. And there's, as a starting point, we should talk about when you're determining, who's going to live in your property. What are we doing with this house? There's two issues. There's the ownership or the deed. How is the deed titled and how will it be titled after the force? And then there's the mortgage and people too often sort of confuse these as one in the [00:03:00] same.

Alex Shelton: And there's really only a few ways that this asset can be settled when the divorce is finalized. As you know, they can decide to sell it. They can buy one of the others out with another asset. In other words, you get this house. I get this house. Um, they can have one of the parties maintain ownership.

Continue to live in the property while the other spouse vacates the property, but they still own it together. And then the, uh, feature that I deal with the most is one spouse wanting to buy out the other one with the property itself. So doing like a cash out refinance to pay off the other spouse and all these have their own little unique scenarios and, and what can work for the future and what can't.

So it's important to figure out what that target is. And I think the first step is sort of figuring out what the value of the home is and figuring out how much equity is there. Okay. So let's start there. Can you, [00:04:00] um, tell someone with the value of their home is I can get an estimate, but I always recommend that you go the full route and get an actual appraisal now with an appraisal.

If they decide they need to do some sort of financing with that property, then the bank or whoever they decide to get that loan through often is going to require their own appraisal. So all the more reason to sort of start talking to that individual early in the process, because appraisals are typically typically good for like 150 days.

Billie Tarascio: So why should someone buy their own appraisal if the bank's going to do it for them anyway? 

Alex Shelton: Well, it's important to figure it out how much equity is in the home and what the value of the property is ahead of time. Cause that could determine what, which of the options you decide, whether you're going to sell it or buy out or uh, any of the other factors that go into determining how you want to split that asset or not split that asset. So [00:05:00] that's why getting her appraisal is important at first and making sure you have an appraiser that understands the reason that they're doing the appraisal, because if you have an appraiser that just does a standard appraisal and it's not on the correct form.

Then during discovery or during that period of time where the separation is going to court, that appraisal could get thrown out if it's not done properly. 

Billie Tarascio: Okay. Um, The interesting thing. There's a lot of interesting things going on here. When you sell a house there's fees that come out there's real estate fees and other, you know, closing costs that are going to affect how much money each person can get.

So when we're valuing the house for a buyout, do you typically recommend subtracting of an amount of money for a real estate fees? 

Alex Shelton: Yeah. I mean, if the idea is to do like a 50, 50 split, then all those fees have to be considered [00:06:00] in less cash back to the person that's being bought out. Same thing goes for future tax liabilities or future interest payments.

You know, if somebody is, let's say there's no mortgage on the property at all, and one person has to get a mortgage to pay off the other one. Well, that money now has interest on it. So is it fair for that person to pay interest on money? When half of that's going to somebody else who doesn't have pay interest on it, those are all things to consider.

Billie Tarascio: Absolutely. Let's say you have a scenario where one spouse doesn't work and that spouse wants to keep the property. Can you use spousal maintenance as income for qualification purposes?

Alex Shelton: That's a really good question. And yes, you can, but there are guidelines in place that determine when that's usable and how long it needs to continue.

So for support, it's a six months receipt of that income and a three year [00:07:00] continuance. 

Billie Tarascio: Okay. So someone will not qualify until they've been receiving the support for at least six months. 

Alex Shelton: Correct. 

And the bank needs to count on the fact that the support amount is in place for at least three years.

 Correct. And so even if you set up like a temporary spousal support, as the divorce is being finalized, Um, a lesser known fact is that let's say the temporary maintenance, uh, it started off at like $2,000 a month.

Well, when the separation agreement is put in place, let's say they've received that $2,000 a month for five months. And when the divorce is finalized, the divorce states, okay. It's really going to be 3,500. Well, because they've already received that income for five months. We can use that six month payment as the actual income to help them qualify.

So the sooner they figure out, regardless of the dollar amount, if that starts early on in a process that gets them into a [00:08:00] home and gets that income to the usable much sooner. 

Billie Tarascio: Okay. Got it. All right. Um, is there a way for an ex spouse to be a co-signer to share responsibility. And is there a way to minimize the impact that that has on their own ability to borrow?

Alex Shelton: That's another great question. So unlike when you co-sign for a car, for example, the person that's, the co-signer is sort of less liable in the mortgage world. Everybody is equal ownership when it comes to the. Uh, responsibility of the mortgage, unless there's something different stipulated in the settlement agreement that says one person is a hundred percent liable for a specific liability.

Billie Tarascio: So will that make a difference to the bank? So let's say we come up with a settlement agreement that says wife will be a hundred percent responsible for the mortgage, even though we're not requiring [00:09:00] her to refi. Does that then impact the husband's ability to borrow at all? 

Alex Shelton: So it won't, it won't count as a debt against him when he goes to purchase another property.

Billie Tarascio: Wow, I didn't know that.. 

Alex Shelton: And that's an important distinction. So, but in order for him to, you know, not be liable for taxes, you know, he has to take his name off the mortgage. So 

Billie Tarascio: Sure, the IRS is not subject, it's not going to say that because your separation agreement says that wife has to pay that we're not going to go after husband, so there is some risk.

Alex Shelton: Yes. And 

if wife decides she can't pay or isn't willing to, or whatever the issue is, if husband's still on that mortgage, that late payment will count against him. So it's still recommend, you know, getting, getting your name off, getting clear title, because it's all about moving forward, [00:10:00] right? It's about creating smaller amount of ripples through life so that you can both move on and I feel the best way to do that is to start separating those assets if possible. 

Billie Tarascio: Yeah, certainly. Usually that's the better way to go. The other thing is that usually if you can't afford it, If you can't qualify for it and you can't afford it, you shouldn't stay in it because you can't afford it.

That's what those things mean. Although right now we're in a situation where rents are so high that people's mortgages are often less than rents are. And so even if they can't quite afford the mortgage, they may be better off in that situation than they would be renting. Are you seeing them? 

Alex Shelton: Yeah, it's absolutely crazy out there.

I mean, home values have continued to rise over the past year. We're anticipating in [00:11:00] eight to 16% appreciation rate over the next year. So the great thing about home as you know, is that if you get a 30 year fixed mortgage, your payment stays the same over those 30 years versus what you alluded to rent.

But you know, there's no stability there. The landlord can Jack up every year, some places have limitations on how much, but still, you know, it's, it's going to go up, whereas your principle and interest payment would, would stay the same and you're, you're gaining appreciation. So it's sort of a no-brainer.

If you can qualify it's, it's better to, to get into purchase. 

Billie Tarascio: Yeah. Yeah. There's a lot of, um, ability for a couple to work together collaboratively and many do many do. Sometimes I see, you know, as part of a divorce agreement, The sale of the marital home and the purchase of another home or the refi of the marital home and the purchase of another home for one of the [00:12:00] spouses, like whatever you can work together, it's usually a better scenario.

And the other thing that's kind of nice for people going through divorce right now is almost everyone has equity in their homes 

Alex Shelton: It's important to figure out where to put that. No other it's in the, you know, you saw the one huge by one or, you know, one spouse maintains one and the other spouse goes to, to buy another one.

Another thing I want to mention is because it's so competitive out there. If people are just naturally spending the cash, you know, number one, maybe they just need to win the deal, you know, whereas in a normal market, they'd be happy to get a mortgage. Um, so it's important for people to know that if you are going to pay cash for that property and you're planning on recouping that upfront investment with a mortgage after closing with a cash out refinance, you look to do that within a 90 day period, or at least apply it within a 90 day period.

Because if you don't, you're [00:13:00] going to limit your, and I'm not a CPA, but you're going to limit your your ability to write off that loan on your taxes. Um, it's considered a, a different type of write off than if you do it within a certain period. 

Billie Tarascio: Interesting. 

Alex Shelton: So as if you're filing a joint return with somebody and he tried to do a cash out refinance within that 90 days, or at least apply, you could write off up to $750,000 of that loan amount as mortgage interest.

If you wait, then you're limited to a hundred thousand dollars. It's a pretty big difference. And with home prices on the rise, you know, that could make a big dent in a tax return 

Billie Tarascio: yeah, it absolutely could. What are some of the biggest challenges you see people running into that makes them unable to qualify for a mortgage?

Alex Shelton: A lot of it has to do with, um, how their income, if they're, self-employed how their income is being [00:14:00] written off, I would say what's good for uncle Sam when you're self-employed is often not good in the mortgage world. Those two worlds rarely collide when it comes to people that are self-employed. So if your goal as a self-employed person, 10 99, you've got an 1120, whatever it happens to be is to purchase real estate.

We're continue to build your real estate portfolio work with a mortgage professional and let your CPA or tax professional know that that's your goal because their job is they see it a lot of times. Is to lessen your tax liability as much as possible. So it's important to get that team together that get that communication going so that I can say, Hey, you know, you've declared this much income.

This is what you qualify for a mortgage. Next year if that's your, your continued goal and you don't make as much, or you don't declare as much, let's figure out what the implications are of going through a 30 year, fixed conventional mortgage or taking a higher interest rate. And [00:15:00] declaring less income and seeing how that tax liability relates to itself.

Billie Tarascio: Absolutely. 

Alex Shelton: That's the number one thing that I see and then maintaining credit as well, you know, keep a close eye on it. Okay. What is the kind of the minimum credit score that you need to have to qualify for a mortgage? 

So 620 we'll get you into conventional territory. I always think of the mortgage options, sort of like a dartboard and the bulls-eye is a conventional loan.

The closer you are to that conventional loan, the better the terms, the better the rates, the lower, the costs farther out you get from that. There are options out there, but you're often going to pay for it, whether it's an interest or a larger down payment or the terms aren't going to be as favorable. So you can get like an FHA loan, which is great for clients that have, you know, some credit issues that they need to work on.

Or VA loans are really lenient when it comes to credit. And [00:16:00] some of those are in the mid to high 500 scores. 

Billie Tarascio: Okay, okay. So we're also in a period of time where people are changing careers at an unprecedented rate, how does that career change impact your ability to qualify for a mortgage. 

Alex Shelton: Yes, there's another really good point. You brought up here. Um, I have client a perfect example. That is a big wig at a fortune five was a big wig at a fortune 500 company high up there getting stock purchase agreements, bonus income, and commission.

Okay. She found a better opportunity somewhere else has the same setup for her employment, but because she's at a new company. You have to have a two year history of those variable income streams in order for that to be usable. So even though she's been, you know, high up and she's going to be making more money with this new line of work, this new job, we have to wait to be able to use most of her [00:17:00] income.

So then that brings me to what's called non QM style of financing. So the pretty much the furthest stuff from that dart board you can get. So that will allow me to qualify her with what's called a no debt to income ratio. And then get her into the property. And then after two years pass, hopefully rates will be a little bit better at that time.

We can now use all of that income to qualify her, get her out of that higher interest, non QM loan, and put her into something that's more in line with conventional guidelines and standards. So there's creative financing out here, out there. It's just a matter of how bad you want to get into the market.

And, you know, do you have the down payment and can you qualify? 

Billie Tarascio: Okay. So then in her case only her salary would count or do you have to be in a new job for two years for your salary to catch. So Valerie counts from day one, salary counts, as long as you've got that, two-year [00:18:00] history of some sort of employment, but as far as like the commission income and the bonus income and the, the restricted stock purchase agreement, income, that all has to be continuing.

Now, there's always exceptions to the rules here. So, you know, nothing super in stone, but in general,

Okay. All right. Um, so back to the spousal maintenance example, uh, you gave, you threw out an example where someone was getting $2,000 a month on a temporary basis. And then their final award was 3,500 is, and let's say that this person had not worked previously is $3,500 a month going to be the total of their income that the company, the mortgage company will consider?

Alex Shelton: Yes. If they don't have any other line of work, if they haven't been working and less, we can write a great letter of explanation as to why she hasn't been working. She was taking care of the family. For example, she was on, [00:19:00] um, um, some sort of leave or disability or, you know, whatever, the reason why. If she's back to work on a salary paid position, we can use that income typically right away, as long as that person has a two year history of working in some field, when it comes to like hourly income or self-employment income things that aren't as set in stone and may vary, then you need a little bit longer of a history for that to be usable.

Billie Tarascio: All right. That sounds good. Um, the other thing I wanted to ask is how much should plan to have. I know that there's such a range in what you can put down for down payment, but between closing costs and you know, the cost of buying a new home when people are going through a divorce, it's a very expensive process for so many reasons.

They've established a new household. They bought new furniture, their pay, their lawyer. It's expensive. How much cash do they need to have set aside to buy a home? 

Alex Shelton: Well, primary residences are [00:20:00] very lenient when it comes to down payment and closing costs. The only real catch is going to be what the debt to income ratio will bear.

So if somebody hasn't owned a property in the last three years, which typically if you're going through a divorce, you have, but let's just say you haven't. You're considered a first time home buyer and that resets every three years. So if you have not had a mortgage in the last three years or had any ownership in a property, I should be very clear there.

Then you're considered a first time home buyer you can get in with as little as 3%. On the conventional loan closing costs are going to be anywhere from two and a half to 3%. So figure 6% with a little cushion because nothing's ever perfect. When you buy a house, you know, unless you're buying new construction, you know, you always want a little, a little bit.

But the bank won't require that. 

Billie Tarascio: Okay. Um, and what, is there an income limit for that to qualify for that? 

Alex Shelton: No income limit on that. 

Billie Tarascio: [00:21:00] Okay. when do income limits come into play. 

Alex Shelton: If you're looking for like down payment assistance programs or, uh, USDA loans, those types of products have limitations.

Although they're usually pretty high. I mean, a lot of the down payment assistance products I see are over a hundred thousand dollars, you know, depending on how much you get for assistance, it's usually between like three and 5%. And the more underneath you are of that requirement, the more assistance you can get and the higher you are, the less assistance you get.

Billie Tarascio: Okay. All right. Um, can everything be done online or are you meeting with people in personally? 

Alex Shelton: I go based on their comfort level. Um, the application is very user-friendly at academy. So we have a mortgage app, which is super handy for those that like, to keep it real in the digital world. So you can apply that way.

And then, gosh, you can even scan your [00:22:00] documentation with your cell phone. Nowadays. I often work with financial advisors and CPAs to get tax returns and bank statements if needed. So that can relieve a lot of the burden for the clients. But, you know, if they're just old school and they've got all their files in a filing cabinet, come on in.

And often it's more fun for me than meeting with people face to face, whether it's on zoom or for right here in my office. 

Billie Tarascio: Okay. So if people are home and they want to figure out if they can get pre-approved by their spouse or buy a house, how do they contact you? 

Alex Shelton: Give me a call at (760) 835-6510. I'm also on Facebook, YouTube, LinkedIn, you name it.

Uh, just look for the Alex Shelton team in your Google bar and I should pop up. 

Billie Tarascio: So. Uh, that's a Palm Springs area. Is that right?. 

Alex Shelton: That's 

where I started my mortgage career. Got it. Got it. Right. Well, wonderful. Thank you so much for your time today. It's been a fantastic episode. Don't forget [00:23:00] to like subscribe, rate this podcast.

Alex has been great reach out to him. If for whatever reason you can't get ahold of him, reach out to me. And I will put you in touch. Alex, do you work with people in Arizona only or all over? 

There was no one in California are currently the two states I'm licensed in Arizona, California. 

Billie Tarascio: Fantastic. Well, that's where most of our listeners are.

Thank you so much for your time today. 

Alex Shelton: I appreciate the opportunity. Thanks Billie. Bye.