A friend of ours, Chris Coggeshall, who is a mortgage broker we work with regularly, wrote the following very helpful article for us:
Deciding what you want to do and what you can do with the house when divorcing is a question that most couples face. In years past, prior to the housing market crash, couples challenged each other as to who got to keep the house. Today’s couples struggle with who wants the house. However, the initial motivation for both of these scenarios has not changed, ‘What is the financial implication?’ In the past one felt it was a windfall to get the house; today it is often thought to be an albatross. But, is choosing what one wants to do with the house just a financial decision?
In some cases it is that simple. More often, however, there are extenuating circumstances that couples consider such as: kids, remaining a part of the neighborhood, improvements made to the property, proximity to work, etc. Conversely, the house will be too big, have too much deferred maintenance, too many memories (time to move on), etc. All of these factors help shape the decision. However, the single greatest deciding factor is the options that exist when an investor is needed and how to qualify for financing. Understanding how the different options are reached greatly impacts one’s ability to obtain financing now and in the future.
Fortunately there is some relief for those that choose to keep the house but have little to no equity but there is a huge catch – HARP 2.0. The original intent of the HARP program was not for those considering divorce or divorced couples; it was designed to allow all homeowners who do not have enough equity in their home to take advantage of lower interest rates. HARP was first talked about in February of 2009, and many changes have ensued since that time. However, there have been no greater changes than the enhancements of HARP 2.0.
What’s the Catch?
If a spouse plans on refinancing using this program ‘as a separate estate’ prior to filing for separation or after final dissolution they need to demonstrate 12 months payments from that individual’s account, not a joint account. This is a deal breaker for many. Others choose to use the program and stay on the loan together due to the huge decrease in home value and lack of options. These are very difficult decisions.
Here are some highlights –
- Your original loan must have been financed by Fannie Mae or Freddie Mac before May 31, 2009.
- You can only refinance once per property under the HARP program.
- You can have no more than one late payment in the last 12 months, with no late payment in the last 6 months.
- Mortgage Insurance companies have now partnered.
- Conditions apply for LPMI (Lender-Paid Mortgage Insurance) on your original loan.
- The current loan-to-value (LTV) ratio must be greater than 125%. (HARP 2, formerly 80%)
- Having a 2nd mortgage should not deter you from the HARP program.
- Up to 125% can be owed on the value of your home. (HARP 2)
- Your 2nd mortgage must be subordinated by that lender. (It’s encouraged, but not required. If your 2nd mortgage lender does not subordinate and you meet all qualifications, make noise.)
- These should be competitive with current rates (within .5 to 1 percent).
- The rate will be based on market rates in effect at the time of the refinance and the homeowner will be subject to any associated points and fees quoted by your lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans must have no prepayment penalties or balloon payments.
Individual scenarios are so vast it is always critical to consult a mortgage professional at the early planning stages of the separation. Cheryl Hubbell (MLO-176331) and Chris Coggeshall (MLO-176083) are Mortgage Bankers/Partners with Cobalt Mortgage and specialize in divorce work as a part of King County Collaborative Law. They take a non biased approach to meeting the goals of the couple.