Karen Or r
D IVORCING Y OUR M ORTG AGE December 2014 Issue
DID YOU KNOW? Fannie Mae Reduces Max LTV on CashOut Refinances to 80% Though it may soon be easier to purchase a home with less money down, assuming 3% mortgages return, extracting existing home equity could become more difficult. Effective December 13th, the maximum loan-tovalue and (CLTV) will be lowered from 85% to 80% for fixed-rate cash-out refinance transactions. For ARM cash-out refis, the max LTV (and CLTV) will remain unchanged at 75%. Working with a Divorce Lending Professional who understands divorce lending guidelines can help your divorcing clients avoid common hurdles in divorce situations. Karen Orr Sales Manager 1705 Dock St, Ste. 1711 Tacoma, WA 98402 Direct 253.228.6800 Karen.Orr@Nafinc.com
The Marital Home “To Sell or Not To Sell” - That is the Question When there is a marital home (or even other real estate) involved in a divorce situation, the same question almost always arises: “What should we do with the marital home?” Typically, many reasons to keep the home and many reasons to sell the home are present and as the advisor, a neutral approach is needed to separate the emotion from the economics.
Do we keep the home until the children are out of school?
Do we sell the home, divide the proceeds and go our separate ways?
Do we have any equity in the home or are we underwater?
Do we refinance the home in one of the spouse’s name only?
Do we sell the home and each rent until ready to purchase gain?
Each question is a valid question; yet each question may also have its own set of consequences that need to be addressed. While the housing market continues to recover making it somewhat easier to answer questions where equity is a concern, many divorcing clients may still need guidance for their post-divorce housing.
Selling or Retaining the Marital Home When the decision has been made to sell or to retain the marital home, a new set of questions is derived and the question of current value is always at the top of the list. When selling the home, working with a professional real estate agent can help determine the value or best selling price. When the decision is made to retain the marital home and refinancing the mortgage into one spouse’s name, an appraisal from the lender’s appraiser is required. Obtaining an independent appraisal PRIOR to refinancing will only incur additional costs for the divorcing clients as the lender will always require their own appraisal. With 10% of all homes with a mortgage still underwater (CoreLogic), having an understanding of where values are headed can be helpful as well. The chart on the following page shows the average appreciation rate per state.
P P age age 22
K a r e n Or r , S a l e s M a na g e r
2014 3rd Quarter Average Annual Appreciation
Average Annual Appreciation By State Housing Price Index 1975—2014 The map and mini charts are color coordinated by Census Division. The figures evidence the average annual rate of increase in the HPI (Housing Price Index) per division and the average first year rate of return on a 20% down payment. The actual rate of return on the purchase of real estate will vary with many factors. This ROR calculation is simplified and designed to show the benefit that can often exist by the use of leverage (financing) a purchase vs. paying cash. Taxes, insurance, maintenance and interest expense must all be considered as well, yet currently, these expenses are often less than the cost of renting a similar home and accordingly, can often cancel one another out.
The HPI or Housing price Index is Provided by the FHFA (Federal Housing Finance Agency). Appreciation and or depreciation from state to state or region to region will vary. Typically, the states with the highest rates of appreciation also have greater volatility while the state with lower rates have comparatively fewer peaks and valleys over time. Each scenario has its advantages for sellers and buyers alike.
www.newamericanagent.com/karenorr
K a r e n Or r , S a l e s M a na g e r
P age 3
Is the Marital Home still Underwater?
A Little Divorce Humor
When the marital home has negative equity there are still options available. Obviously, selling the home with a short sale may be an option if approved by the lender; however, there may be future consequences when purchasing a new home. When one spouse wants to retain the home and refinance into their name alone, as long as the property qualifies for the HARP Program and the spouse qualifies for the new mortgage; this may be an option. However, when the home doesn’t qualify for a refinance and one spouse wishes to stay in the home and take over the current mortgage payments and the departing spouse is adamant their name is removed from the mortgage— a judge may order the home sold. Again, forcing a short sale will have detrimental effects to credit and future financing. Please don’t hesitate to contact me directly to review all options available for both divorcing clients.
The Cost of Renting vs. the Cost of Owning Many divorcing clients will make the decision to rent following a divorce for many reasons; however, there’s more to the cost of renting vs. buying than just comparing the dollar cost of the payments. Many will argue against the value of purchasing a home vs. the comparatively risk free alternative of renting. The image below can be used for determining whether to rent or purchase a new home as well as the economical decision to sell the marital home and rent or retain the marital home. To be conservative, we used a rate of appreciation here of only 3%; yet the national average over the last 50 years exceeds 5%. Some will also argue that the tax deductibility of mortgage interest and real estate taxes is never really worth it. What they really mean is that everyone has a base line standard deduction and not everyone’s total expenses will be more valuable than that. Even if you exclude the tax benefit, the bottom line difference vs. renting will still be better. Factors used above: $200,000 purchase price, 20% down, $160,000 30 yr fixed at 4%. Principal & Interest payment = $763.86, taxes = $250/mo., insurance = $50/mo. & Maintenance = $166.67/mo. Tax deductibility at 28%. Tax savings principal paid and appreciation averaged over a 5 year period. Always consult with a tax advisor for tax advice specific to your situation. Don’t hesitate to reach out to me at any time and I will be happy to run specific scenarios for you and your divorcing clients.
www.newamericanagent.com/karenorr
Karen Orr Sales Manager New American Funding 1705 Dock St, Ste. 1711 Tacoma, WA 98402 Direct 253.228.6800 Karen.Orr@Nafinc.com NMLS ID 40351 Corp NMLS ID 6606
As a professional mortgage originator, I have helped first time homebuyers, retiring couples, divorcing couples, move up buyers and more achieve homeownership. I love what I do and can’t imagine myself in a different career. When is it the right time to call me? In the very early stages of the divorce! When real estate financing is involved, we can work together to determine the right time to file the motion, how to structure support to meet qualifying income guidelines and much more! It’s very important to know the options pre and post decree. Otherwise, you risk your client NOT being able to meet post decree financing requirements. If I can be of help to you, your family, your clients or your friends, please let me know. Mortgage planning is a big responsibility and I want to be there for you whatever your need is. Please don't hesitate to contact me via phone or email if I can answer any questions for you in regards to mortgage finance.
F I N A N C I A L S T R AT E G I E S FOR DIVORCING COUPLES There are over 2.4 million divorces in the US every year. Here are some tips and strategies on how to maintain your lifestyle after a divorce and how to evaluate various financial settlement options prior to a divorce: As a Divorce Lending Professional, I help your clients understand and evaluate the options related to disbursement of real estate assets prior to the divorce settlement. This could include an evaluation of whether they should:
Sell or refinance the home or other properties in order to buy-out an ex-spouse Accept or pay spousal support, child support or a higher cash flow payment versus a lump sum distribution involving real estate equity.
I help evaluate the cash flow and home equity protection implications of various financial decisions before, during and after a divorce. This enables clients to:
Maintain their lifestyle
Keep their children in the same school system as a single parent
Live in the home that meets their needs without breaking their budget
I help your clients enhance their liquidity and protect their real estate equity from legal liability prior to going through a divorce by working together with your CPA, CFP, attorney and other advisors. I help your clients implement a step-by-step plan for how to re-establish their financial footing after going through a financial rough spot. This may involve:
Financing in stages - a refinancing or debt restructuring plan that takes place over time Sale/Leaseback or Rent-to-Own strategy - a way to keep or purchase a home or when they can't qualify for traditional financing options right away.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Not a commitment to lend. Copyright 2014 All Rights Reserved The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.