Are mortgages and divorce just like oil and water? To many, it would seem so, but to Katie Walsh— who is a residential mortgage lender and certified divorce lending professional—it’s an opportunity to think creatively, strategically, and to lay the groundwork for your future ahead.
We sat down with Walsh to learn more about the relationship between mortgages, refinancing, and divorce.
According to Walsh, determining how to divide homes, managing existing mortgages, and deciding who should stay or who should go, is a huge piece of not only real estate, but the divorce process.
“Whenever possible, I love meeting with both parties to have everything be transparent and calm, and to really just set the groundwork for how it all comes together, and how the wording in the dissolution of marriage actually directly impacts the interest rate and how the loan is structured,” says Walsh.
She goes on to explain that, when meeting with clients who are considering divorce, there are two primary factors that need to be considered.
“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.”
In regard to equity payout, it’s important to note which scenarios will allow you to utilize equity while preserving a low interest rate.
“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 an investor,” says Walsh. “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'—those two scenarios are divorce, and paying off student loans.”
If a spouse would like to stay in the home and acquire the mortgage, Walsh highlights the important role that refinancing plays in the process of taking off the other spouse from the loan.
“Refinance is critical for removing the departing spouse from title and from the mortgage. That's a key ingredient if you don't want to have that financial obligation for someone that is not your spouse.”
But what about the spouse who may not earn as much income, or has been a supporting spouse at home—what are their options for taking over a mortgage, or qualifying for a new loan, if they do not have enough income? According to Walsh, this is why support payments play such an important role in the process, as they can supplement lost monthly income and help an individual qualify for a loan.
“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, that can be a pretty scary scenario. 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,” says Walsh. “What that does is it allows for funds for down-payment, but it's not giving that monthly income which a person would need to be able to qualify.”
Ultimately, the decision to either take a payout versus arrange for support payments, depends on each spouse’s individual circumstances, income, and personal needs.
“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 plan for their retirement and future, whatever they need,” says Walsh. “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.”
With so many nuances to the process of divorcing, refinancing, and qualifying for new home loans, it becomes increasingly important to consult with experts who can apply their knowledge and assess the situation to ensure that it’s not only dealt with properly in the present, but that your future is set up for success in the future. According to Walsh, it can make all the difference.
“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, and you're not going to receive a bill for sitting down and having a chat—that's just not how our compensation works. This is an element that is part of that divorce, so it's important to know your options and to start those conversations early. So that's my biggest piece of advice—have those open discussions.”
If you would like to learn more about how Katie Walsh can help you through your divorce, you can contact our firm at (503) 227-0200 to get connected.