Post divorce contracts and more add to the often complicated finances of remarried pairs, putting hopeful couples into home-buying jams. Look for trouble signs before you sign on the dotted line.

Laura and Dennis were sure they had thought of everything: She had delivered their “official” divorce decree to me just the week before, complete with nifty gold-embossed seal. The court order spelled out the terms clearly: She was to “buy” the house from him and share the equity. The home was appraised at $185,000; the equity beyond the outstanding mortgage was $80,000. She planned to assume the mortgage, paying him a fair half of that equity – $40,000. Not so fast.

Their nightmare was just beginning, and it’s a cautionary tale for any couple who is contemplating moving into a new life with a minimum of housing hassles. Although a first-home purchase has its own financing issues, it’s a relatively easy transaction. Prove your income, prove that you have cash for settlement, convince lenders you can afford the mortgage. Couples dealing with exes and more have an entire new set of issues to consider, beyond the last year’s depressed housing market and mortgage crises, with financial and legal piling onto emotional ones.

Beware the Court Order

Laura and Dennis seemingly had all their ducks in a row, but on careful rereading of their decree, I realized it did not require that she buy the home at all. Instead, she was to assume the mortgage and give Dennis his half of the equity. Although that document implied that Laura would buy the home from Dennis, it did not mention who would pay closing costs or whether the appraiser would be acceptable to a lender, and it did not include a specific payoff statement to close the loan before opening a new one. Laura thought that because she had been living in the house for so many years, she should have no problem at all getting a mortgage. After all, it was her house. Likewise, Dennis thought that he could easily buy a new home of similar value.

Most people fail to realize that just because a judge orders an ex-spouse to pay the other spouse’s bill, it doesn’t mean that the creditor has to abide by that decision. In this case, the judge may have decreed that Laura would assume the mortgage liability to Wells Fargo, the lender, but it doesn’t mean that Wells Fargo would let Dennis off the hook. If Laura were to default on the mortgage, the financial institution would certainly sue Dennis. And removal of Dennis’s name from the deed might prompt the lender to declare a technical default and begin foreclosure proceedings.

Dennis was horrified to learn that, as long as his name was on the original mortgage, he wasn’t as financially set as he had thought to buy a new house. To qualify to purchase, he would need to get his name off of the previous note. He also would need both the equity cash and the reassignment of title. Laura was able to prequalify for a loan, and eventually received approval from another lender.

However, this story suddenly took a turn for the worse. Laura lost her job of more than 5 years. Because the court order didn’t anticipate this ugly turn, both she and Dennis were stuck – no mortgage originator would be able to help them at that point. I advised her to find a job in a similar line of work as quickly as possible to uphold her good credit. Although Laura was interested in self-employment, that path would be risky for her now, because it takes years to establish provable income to qualify. Fortunately, Dennis realized it would be in his best interest to help Laura out financially with the mortgage so that he would be in good financial standing to eventually buy his own house.

Don’t Assume Anything

It sounds like a great idea, but, as a practical matter, an assumable mortgage doesn’t exist anymore. If the lender agrees to have one person assume an existing mortgage, it can be done as a matter of contract law. During the past 15 years in my practice, though, I have not witnessed a single assigned mortgage in a residential transaction. Why? Not only do lenders not make a profit when a loan is assumed, but most mortgages today are bundled and sold to Wall Street investors, insured through federal programs such as Fannie Mae or Freddie Mac, or both. Any change in borrowers prompts a new underwriting of the loan to ensure that the assuming borrower will comply with that lender’s or insurer’s requirements. In Laura and Dennis’s case, letting Dennis off the loan certainly would not benefit Wells Fargo. Laura and Dennis may agree among themselves (or a court order could stipulate) that Laura will pay that bill, but the lender will hold Dennis liable too.

The Value of Child Support and Alimony

In another situation, Marge, divorced from Stanley nearly 3 years before, was awarded $1,500 a month in alimony for 5 years and $2,100 in child support each month for her three children, ages 9, 16, and 17. Previously a stay-at-home mom, Marge landed a job as a medical secretary paying an annual salary of $30,000. She wanted to know whether her child support and alimony could be counted toward her total income so she could secure a mortgage and buy a home.

Unfortunately, she can use only $700 per month additional income derived from the child support of her youngest child, and none of the alimony. Why? According to a Fannie Mae underwriting guideline, lenders will allow alimony and child support to count as income only if the payments are guaranteed for at least 3 years. For example, if a prospective borrower plans on using income from alimony and child support payments to qualify for a loan, but documentation such as a divorce decree or separation agreement specifically states that the payments will cease once the child reaches age 18 – and the child’s age listed on the application is 17 – the lender assumes that the suport will cease before the requisite 3 years.

Within 3 years, Marge’s older children would be turning 18, so a lender could not count on that portion of her child support income. Likewise, although the alimony was obligated to last for 5 years, 3 years had already passed. In my experience, many lenders assume their borrowers will receive child support and alimony payments on time, if, historically, that has been the case. Typically lenders will require borrowers’ bank statements as evidence that such support monies are deposited on a regular basis.

In the end, Marge had two choices: either downsize or get creative with financing. She wound up buying a comfortable townhouse, on a 40-year fixed mortgage, through a Fannie Mae “My Community” program.

Because alimony generally terminates on remarriage, some people may decide not to remarry to avoid losing the monthly checks, and, in some cases, pension benefits. If they do take the plunge, though, they may have outgoing alimony payments to consider. According to the underwriting guidelines, payments persisting beyond 10 months, however, are considered part of the person’s recurring monthly debt obligations.

Your Worse Nightmare

I still get nightmares when I think about the story of Peter and Betty. After arriving home from work one day, Peter found a handwritten note posted on his front door. The occupants of the home would need to vacate voluntarily, it said, or the writer of the note would have the local sheriff forcibly remove them. Peter called the number on the note and learned that the writer, John, was an investor who had purchased Peter and his wife’s home at a foreclosure auction. Peter thought it was either a bad joke or a huge mistake, and immediately called the mortgage company. As it turned out, John was telling the truth. Peter and Betty’s home was auctioned for nonpayment of the mortgage.

Peter couldn’t believe the news. Each and every month, he would give Betty money to pay the mortgage and the couple’s other bills. Or, so he thought. To his dismay, he discovered that Betty had not paid the mortgage. Instead, Peter told me, she stashed away the cash in anticipation of leaving him for another man. She managed to pick up the mail first and had the answering machine take the collection calls, which she then promptly erased. Peter didn’t have a clue that his house was lost or that his credit was ruined. As a mortgage originator, I could only assure Peter that, in time, he would qualify again for a loan. Although foreclosures remain on a person’s credit record for 10 years, if you can build your credit back up, you may qualify, with some lenders, for a mortgage following foreclosure after just about a year.

Be Smart, Be Prepared

Most divorce situations are not as severe as Peter and Betty’s, but many people fall prey to legal, financial, or other issues. A former spouse may have been meticulous about paying bills during the marriage; credit worthiness often is a reflection of lifestyle. After a divorce, or during the period of the legal separation, that lifestyle is often in turmoil. The spouse’s ability to repay debt on time may reflect that upheaval, particularly if he or she is living with someone else who has a different philosophy about paying bills. It pays to plan ahead.

If you are in the throes of divorce, you may help safeguard your credit standing and financial security by taking these steps:

• Protect yourself from future liability by making sure that you and your estranged spouse have no joint debt or bills. Get a copy of your credit report (and your spouse’s) as a baseline.
• If you do have joint liabilities, protect your credit score by making sure you make payments on time, especially if your ex-to-be is supposed to make the payments. Remember, just because the court may order your estranged spouse to make payments, if he or she makes late payments, those actions will affect your credit.
• Consult a mortgage professional before writing an agreement between you and your spouse. If one spouse has agreed to buy the marital home, make sure that spouse will be able to qualify for a mortgage. Even better, find a loan officer who has dealt with the intricacies of remarriages and more complicated financial situations.
• Don’t simply rely on your divorce attorney, who is not in the mortgage business and likely will not be familiar with mortgage-underwriting guidelines. Instead, talk to an experienced and independent mortgage broker or mortgage originator. You may not immediately be able to get a mortgage, but the advice you do receive may make a huge difference in how soon you will once again be able to buy a home.

David Pearl, JD, a former practicing attorney specializing in family estates and trust law, is a licensed mortgage originator associated with Prime Rate Funding Group, Inc., and is co-author of the book “Secrets to Owning Your Dream Home With Little Or No Money Down Regardless of Credit.”