A single word in a divorce decree can shut down the best financing option available to your client and it happens more often than most mortgage professionals realize.
In one case handled by Rock Rocheleau, an attorney at Right Lawyers in Las Vegas, divorcing parties drafted their own decree and used the word "refinance" to remove the wife's name from the mortgage. But the lender was processing
"This is exactly why I advise mortgage originators to look into decree language before its finalization and not afterwards," said Cody Schuiteboer, president and CEO of Best Interest Financial in West Bloomfield, Michigan.
The refinance vs. assumption trap
Lawyers routinely write "refinance" into decrees expecting courts and lenders to treat it as shorthand for removing a spouse from a mortgage. They don't.
"This is an extremely dangerous practice since there is
Schuiteboer had clients splitting up whose existing mortgage was a 3.25% FHA loan. The property appraised for $520,000 and the remaining spouse needed to buy out the other for $140,000. A straight refinance would have pushed the rate to around 7%. His solution:
Three states — California, Maryland and Virginia — have now passed laws expanding the ability to assume conventional mortgages in a divorce, limiting lenders' ability to deny assumptions when co-borrowers want to keep the home at the existing rate and term. Maryland's law took effect Oct. 1, 2025. Virginia's takes effect July 1. California's applies to conventional mortgages originated after Jan. 1, 2027.
Law firm Sheppard, which analyzed the statutes, advises lenders to treat this as the beginning of a trend and build a state-by-state assumption matrix tracking trigger events, qualification standards and disclosure timing. Monitor for copycat legislation, the firm warned.
A lot also depends on whether it is an equity distribution state, in which assets are divided based upon what a court deems as fair, or
The DTI problems nobody warns clients about
Even when the decree is well-drafted, underwriting can unravel the deal.
Jeffrey Hensel, broker associate at North Coast Financial in Oceanside, California, flags a common scenario: a client trying to buy a new home while still on a joint mortgage from the marriage. That existing payment counts against their debt-to-income ratio. They're carrying the cost of a house they no longer live in.
Some lenders, however, will exclude what Hensel calls "divorce-debt-lumping" from the DTI calculation entirely, if the decree clearly states the departing spouse bears no responsibility for the mortgage. "Most of those who are undertaking this process are unaware of this option," he said.
Schuiteboer flags two other underwriting pitfalls that frequently appear in divorce decrees: incorrect contingent liability language and unrealistic time frames. On contingent liability, the wording must meet Fannie Mae requirements for excluding the joint mortgage from the DTI of the spouse buying a new home. Get it wrong, and that person may be unable to qualify for new financing at all.
What the decree must spell out
Beyond the refinance-vs.-assumption issue, decrees often fail to address the mortgage at all.
Rocheleau said the most common gap in self-drafted paperwork is identifying who gets the house with no mention of the underlying loan. Years later, the spouse still on the mortgage tries to buy a new home and discovers the other party has no legal obligation to remove them, because the decree never required it.
Closing costs are another frequent omission. If the decree doesn't account for them, the refinance math may not work even when everything else does. And if the remaining spouse can't qualify on their own, based on individual credit, income and DTI, no court order can make the refinance happen.
Jeremy Schachter, a branch manager for Fairway Home Mortgage in Phoenix, had a client who relied on a verbal agreement with their ex: if either wanted to buy a new home, the other would sign a disclaimer deed. When the time came, the ex refused. The deal fell through and the buyer lost their earnest money deposit. Schachter's advice: before a client makes any offer, have an attorney formalize any documents the ex will be required to sign.
Don't overlook the tax exposure
Improperly divided assets can create tax liability that surfaces years after the divorce is final, said Chad Silver, CEO of Silver Tax Group in Farmington Hills, Michigan.
"Most couples are caught off guard by the tax ramifications that ensue," Silver said. When one spouse eventually sells the property, the cost basis is calculated from the original purchase price, not the value at the time of divorce. That gap can mean a significantly larger capital gains bill than either party anticipated.
Your role as a neutral educator
The underlying problem in most of these cases is that divorcing clients don't know what they don't know, and they're not in a great headspace to learn.
"They are already under so much stress, trauma," said Reetu Mittal, a mortgage loan officer at Vema Mortgage in Phoenix. "So as
That means getting involved early, before the decree is finalized, and flagging language that could create financing problems down the road. It also means understanding that lender guidelines override court orders. A judge can award the house to one spouse, but the lender decides whether that spouse can qualify.
The originator who understands these intersections becomes indispensable, not just to the client, but to the attorneys handling the case.
