By Cheryl Hubbell, Cobalt Mortgage

Few parties contemplating a divorce fully understand how the divorce process might affect their ability to refinance their existing homes and/or buy new homes. The same could be said of most traditional family law attorneys. It’s just not something they are trained to deal with in court-based litigation. However, with early planning, and as importantly, the right kind of cooperation, divorcing parties can work together to reach optimal solutions.

For example, once a divorce petition is filed, it is reflected on the public record as a pending dispute. As a result, lenders and title companies will not approve or insure a new loan until a binding settlement is reached. This can cause unexpected and unnecessary delays. Therefore, depending on the circumstances, sometimes it makes sense to finalize any new home purchase or refinance before formally filing for divorce. Other times it makes sense to file the case first. But to carefully weigh these options requires collaboration, not litigation.

A number of other recent developments in the mortgage lending industry will directly affect many divorcing parties and should be addressed as early as possible in the divorce process.

For instance, Fannie Mae and Freddie Mac used to require that support payments be received for only three months before they could be included in a borrower’s qualifying income. That period has recently been extended to six months (prior to loan closing). And the payments must be scheduled  to continue for at least three years after the loan closing, per the parties’ property settlement agreement. Each lender, however, will have its own guidelines that may be more restrictive than Fannie and Freddie.

Refinances have long presented unique questions in the divorce context, especially in recent years as so many properties have gone underwater. HARP (Home Affordable Refinance Program) previously imposed the following requirement for refinances of properties at 80% LTV or more (without PMI):  the borrower had to have made 12 months of payments from his or her own account in order to successfully remove a spouse from the title to the property. That requirement has been lifted. Thus, divorcing parties should have an easier time removing spouses from the title to underwater or low-equity properties.

A final consideration for this post is what is known as “continuity of obligation.”  Lenders require continuity of obligation in order to refinance a home in one spouse’s name following a separation or divorce. In order to establish the continuity of obligation required to refinance a home, the borrower refinancing the home more often than not must have either been on title to the property (not necessarily on the mortgage) for at least six months, or have been awarded the property in the property settlement agreement.

Again, with cooperation, foresight, and advice from a collaboratively trained mortgage professional, divorcing parties can work together to ensure that they are able to finance homes during and after their dissolution.