Tuesday, November 11, 2014

How To Cite Debt Account Numbers in a Divorce Decree



Typical problem in mortgage financing for divorced borrowers: Divorce decrees assign debts and generally designates those debts by citing the creditors and account numbers’ last 4 digits. A debt assignment might look like

a.    Debt to CITI card account number XXXX 8109 or,
a.    Debt to CITI card account number ending in 8109.  

One would think – no problem; how often are the last four digits confused with another debt belonging to the spouse? But, that’s not the problem. Here’s the rub…

Most credit reports cite the first 12 digits of a revolving account, LEAVING OUT THE LAST FOUR DIGITS TYPICALLY CITED IN A DIVORCE DECREE.

This makes the assignment of debt impossible to determine for a mortgage underwriter – impossible, that is, without extra documentation. An account statement must be obtained, matching the full account number to the partial number cited in the decree and partial number cited in the credit report. But, have you noticed lately – credit card statements are (more and more) only citing the last four digits of the account number. Obviously, this is all for security – or to make the consumer feel more secure. So, if such is the case, the borrower has to fax or scan their actual credit card to the lender so that the match can be made. Hold on – that’s not the end of it. Common sense and clear documentation would, at this point, have the correct account matched up properly for the underwriter. But that’s not always good enough. Increasingly, lenders want the credit report to match up and to verify the full number so that it is VERY plain that the account assigned in a decree sufficiently matches the debt on a borrower’s credit report. This requires a little time and little money – not a lot now but, I anticipate more as time passes.

One might think “they’re getting a little picky here aren’t they?” I have only one response – you have no idea! [See my eyeballs rolling?]

There are two simple fixes –pick one.


There is actually another one – make sure the borrowing client is working with me and I’ll take care of all this, spelling out in painful detail exactly how the decree’s assignment of these debts should appear – all you do is copy-and-paste; and, do your lawyer stuff – bam yow! Problem solved.

But, let’s say your client (or opposing) will need to finance the mortgage. But, for some inexplicable, insane reason they are not using me for the financing. Can you still help them? Yes. Here’s how.

STRATEGY NUMBER NEXT - The full, the best, the most assured FIX – outside of my report

1.    Get a copy of the credit report (of the client who must finance or refinance a mortgage) from the mortgage company they are working with. Pulling your own or having the client provide one they obtained from the internet will not work. All reports are not equal and only information that appears on the lender’s credit report matters.

2.    Make note of all accounts to be assigned (to either party) in the settlement – match up the credit debt information you have with the credit debt information on the credit report. Think like an underwriter….a suspicious underwriter (as if there is another kind).

3.    AMEX is different – deal with it first. AMEX uses and “account identifier” number – not the actual account number or any partial citation of it. I call it a “faux number.” It usually begins with a 3. Cite the entire number. If someone “harvests” this number from your decree in public records, they can’t really do anything with it – it’s not the account number. I would cite the AMEX card number as you usually do – maybe “ending in 3389” or something like that; and then, tag the designation with “also identified by faux account number 3333444455559999,” the number printed on the credit report.

4.    In most other accounts listed in your decree, cite the accounts by the account numbers appearing in the credit report – or some recognizable part of those account numbers. You do not need all the numbers – just enough for the underwriter to recognize the assigned debt.


You have VISA Card account number 4444 5555 6666 7777 and you would normally cite this account as

VISA account “ending in 7777” or “XXXX 7777.”

The credit report cites the account numbers as 4444 5555 6666…leaving out the 7777 that you would normally cite.

You would simply write it as VISA account “beginning with 4444 and ending in 7777” or “4444 XXXX XXXX 7777.”

You could actually cite it as “beginning with 4444” and leave it at that. Why? Because the underwriter can see that the account number begins with the 4444.

You can do this with any variation of account numbers as they appear on a credit report.

Sometimes a creditor only reports 4 digits of an account number. Truck payments come to mind for some reason. You know that, most likely, there are more digits in the actual account number. It’s a pretty safe bet that you could cite those 4 digits as “designated by [actual four digit number].” When it’s an installment payment rather than an open revolving account, what’s a n’er-do-well going to do with that account number anyway? Pay a little extra against the balance?

STRATEGY NUMBER NEXT – if you do not have a credit report to work with

This is the shortest and easiest – and most nearly always will work.

Use the first few/four digits and the last few/four digits to designate a debt. You obviously need to have the account statements with the full account numbers on them. But, it’s rare that a credit report would use a citation of account numbers that did not include either the first few digits or the last few.

Friday, May 16, 2014

How and When To Order an Appraisal In Divorce

How and When To Order an
Appraisal In Divorce

A few years ago, two divorcing parties had obtained an appraisal (directly from a reputable appraiser) on their house which reported a value of $545,000. Based on the perceived equity, the buyout was agreed and the grantee (husband in this case who needed to refinance and include the buyout amount) called me.

Note, I was called in after the settlement numbers had been agreed.

Because of new federal rules, the appraisal which the parties had obtained could not be transferred or used. It could not even be consulted or used as a reference point. We had to order our own through a “black-hole / round-robin” ordering system known as an Appraisal Management Company. These are order-takers created by politicians (now included in Dodd-Frank) which add their fee and nothing much else. The cost for appraisals has risen from about $300 to over $500 in the past few years chiefly because of this newly required process.

The appraisal we obtained reported a value of $470,000. The loan approval was null, the new terms of the loan changed dramatically including the interest rate and the price of costly mortgage insurance. Because the borrower’s new LTV (Loan To Value) ratio – significantly higher than anticipated because of the lower value – did not allow a debt ratio above a certain ratio, we had to take the loan to another outlet and almost were not able to close the transaction.

If financing is required, no other appraisals count. In fact, they could be quite misleading. Only the appraisal ordered by the lender can be relied upon; and, even that one must be underwritten and accepted by the lender.

So, how can divorce negotiations obtain accurate, reliable and - most of all – FINANCEABLE appraisal reports?

The straightforward answer is – call me.

And, here’s why.

We can order the appraisal as part of a loan application process. We can even get the loan into underwriting – not only before final divorce but before final figures are agreed. This will give assurances to both parties and the attorneys that a fair, reasonable and financeable opinion of value has been obtained.

Along with the appraisal, you can receive a report on the rational calculation of “net equity” in a property. This includes finance costs and considers the industry maximums allowed in financing.

Here are the options:

1.    Pursue an opinion of value on your own
a.    Takes several days to order and obtain
b.    Who is qualified to review and evaluate the appraisal; and how much time will that take and at what cost?
c.    Sometimes two appraisals are ordered; generally, because each side suspects that the other will somehow manipulate the opinion of value; this suspicion alone should give us some idea of why the process if flawed. (Recently heard of two appraisals – one reporting a value of $305,000 and the other of $365,000 – that’s a nearly 20% differential. At least one appraiser was either manipulating or being manipulated).


2.    Call me.
a.    Now “ain’t” that simple?
b.    No cost other than the actual cost of the ONE appraisal.
c.    Someone else reviews and evaluates the appraisal – the company that is lending money on it!

You can save a lot of time and expense and confusion by developing opinions of value based upon the only reliable information available in financing – the appraisal ordered as part of the loan process.

Oh yes…my phone number and email. J

Noel Cookman

Other aritcles about appraisals as they relate to the process of divorce. For reference and research, please visit

Appraisals In The Dodd-Frank Era

New Regulations

Wednesday, May 14, 2014

Should Divorce Settlements Always Require a Refinance? Part 2

Full question: Should Divorce Settlements Always Require a Refinance of the Awarded Property?
Part 2: Can The Awarded Party Refinance?

If the issue of “should” is resolved, what of the issue of “can?” That is, if the consensus is that a grantee should refinance a debt, the practical question becomes, can they qualify to do just that? What good can come to parties if a philosophical agreement is not followed with practical action?

The question is: Can someone turn white paper into green money? That is, can they actually complete the refinance transaction and close their loan in a timely manner?

It’s one thing to have a filed or entered agreement or some judgment from a court. That’s merely white paper – e.g. A Special Warranty Deed with Encumbrance for Owelty of Partition and/or a Decree of Divorce that requires the refinancing of a debt. Until a financier acts upon that agreement and produces a loan that puts money into the hands of creditors or grantors, it remains white paper at the court house.



The shortest distance between A and B here is for the potential grantee to call me (at 817-454-4555 or email me at noel@themortgageinstitute.com). By applying for a mortgage loan, the party and his/her attorney can be properly informed about loan approval and the conditions required.

I receive calls frequently from attorneys in meetings (mediation, collaboration, consultation, etc.) who ask about one of the parties’ ability to obtain mortgage financing. THIS IS THE JOY OF MY PROFESSIONAL LIFE . . . because this is the heart and soul of solving problems before they become problems.

Attorneys seem to always know the pertinent information to give me. But, so that you know for sure what information I need to give a preliminary “Yes, that is probably in the range of qualifying” or “No, those numbers will probably not work,” here is a list of facts I need to know:

1.    Which party is being awarded the house?

2.    Income of the grantee/borrower

a.    Employment income (length of time on job or in particular “line of work”)

b.    Support income (and continuance; children’s ages for child support suffice)

3.    Approximate value of house

4.    Approximate balance on mortgage(s) - and, if one of the mortgages is a "cash out"

5.    Approximate debts against grantee/borrower (post-divorce).

6.    Preliminary idea of credit rating

Obviously, I will have to take an official application, pull credit, examine documentation and make a complete assessment before delivering a written pre-approval. But, answers to these questions will enable me to give you a sense of whether or not we are “in the ballpark.”

I really encourage you to host or attend my course Credit & Mortgage Qualifying in Divorce so that you will have a working knowledge of just a few rules that affect divorcing clients’ ability to get financing. (It has 1.000 CLE credit hours). For now, though, here’s a cheat sheet.

1.    Support income can qualify if it follows these simple rules

a.    Must develop a 3-month history (for FHA) or 6-month history (for conventional) of support payments. Informal payments (not ordered through temporary orders or in an MSA or in a decree) can count. So, start any time. Just document it properly.

b.    Must continue for 3 years after loan closing (not just after final divorce). 35 months do not count. 36 or greater are required. Yes, it’s that stingy in underwriting.

c.    Documentation is critical. Funds must come from payer’s sole/separate account and deposited into payee’s sole/separate account. We recommend one check/payment for child support and a separate check/payment for spousal for at least the amount that is needed or contemplated. If there is doubt, more is better because the qualifying amount is the lesser of what is documented or what is ordered. There must be clear evidence of payment and deposit. Think old-school – cancelled checks with deposit receipts.

2.    New employment income can qualify if

a.    The borrower has 2 years or more of experience in the particular line of work

b.    The borrower has college or trade training for a particular line of work

c.    There has not been a significant “gap in employment.” This is the tricky one and often comes down to the underwriter’s comfort level. If other elements of the file are strong – like low debt ratios, low LTV (Loan To Value) ratios, large assets, very high credit scores, strength of employment, etc. – then job gaps create less concern.

3.    Appraisals are critical – and yours doesn’t count. The only appraisal that is operative in financing is the one ordered by the lender. The appraisal that was obtained by the wife, the husband, the attorney, the judge and the mediator are irrelevant to the financing process. So, before agreeing on a buyout figure, I highly advise early application and ASAP appraisal ordering. We take care of that, of course. Don’t assume that there is lots of equity in the house based on anything. For example, some borrowers cannot finance more than 80% of their home’s value. This is not just the case in Texas “Cash Out” (or Equity) financing wherein the LTV is limited by law; some borrowers do not qualify for mortgage insurance (required for most loans above 80 LTV) or second liens; and, sometimes when they may otherwise qualify for mortgage insurance, the increased payment causes their debt ratio to exceed allowable maximums.

When there is agreement that the awarded party should refinance the mortgage (held jointly or in the name of the grantor), the attention should immediately turn to the question - can the party qualify for financing? Only a competent Divorce-Lending Specialist should be trusted with this task.

I just happen to know a Divorce-Lending Specialist. In 2002, I began developing a unique niche that catered to family law attorneys and their clients – offering loan approvals before final divorce so that all parties could be assured of financing. In other words, for 12 years now, we have been “turning white paper into green money.”

Always At Your Service,

Noel Cookman

Wednesday, May 7, 2014

Requiring Mortgage Refinances in Divorce? Part 1

Should Divorce Settlements Always Require a Refinance of the Awarded (jointly-financed) Property?


Part 1

First, there are obvious situations whereby an order to refinance an awarded property makes no sense. The chief reason is if/when the grantee is the only party on the promissory note. A refinance in such a case would not be necessary in order to remove another party from the credit liability. (It may be obvious but refinancing the note is not necessary in order to remove a person from title or in order to effectively remove a person from the deed. A simple Special Warranty Deed at final divorce will accomplish this). Financing may be in order so that the grantee can borrow monies for a buyout to the grantor. Or, refinancing may be in order if it simply makes economic sense (by obtaining a better rate and terms) but is unrelated to the divorce.

I am addressing scenarios wherein the divorcing husband and wife are joint borrowers on a mortgage note; and, one party will be awarded the house and assigned its debt.

The straightforward answer is “Yes, in nearly every case.” At the very least, I believe that the default answer should be “yes” and a “no” answer should require a compelling set of reasons why not.

I am not addressing this issue from a legal perspective. I am addressing it from a practical and financial perspective.

But, as we shall we, even a logical order/agreement (in the spirit of a “fair and equitable” settlement) that the grantee be required to refinance the mortgage is not the pressing issue. The looming question is can they refinance the mortgage?

But, let’s first tackle the issue of “should.”

The situation and trend by which settlements are awarding properties to parties without some requirement to finance it in their name and liability is somewhat perplexing if not troubling. It is doubtful that any judge in Texas rules so as to intentionally create a financial fiasco for the parties in the future. But, grave financial difficulty is the outcome in so many cases.

My experience tells me that judges simply do not know what to do or how to effectively order a refinance; and, when a judge believes that he/she can fairly order a refinance of the awarded property, how does this same judge do so with any confidence that the order can be followed? Many times they are presented with testimony or statements that indicate the inability in inadvisability of a refinance; or, they hear the opposite, that the party can indeed refinance the mortgage with no problems. On one occasion, a Good Faith Estimate was submitted as evidence that a party DID NOT qualify for a mortgage! (By the way, all lenders have denial letter templates and can issue them with reasons why the loan was denied; better yet, when I evaluate a loan application for a divorcing client who does not immediately qualify, I state why and what it will take in order for this client to qualify. In any case, what is a judge to do with a Good Faith Estimate? It tells him/her nothing).

So, how does the judge know? And, inasmuch as attorneys, parties and mediators might reach an agreement to the same effect, the question applies to the entire divorce settlement (whether by order or by agreement).

I have seen the following orders or agreements (in divorces) related to a property’s mortgage:

-       No requirement of any sort that the grantee refinance (even in cases wherein the grantor is on the existing mortgage note).

-       An open-ended requirement to refinance

-       A requirement to “make best efforts” to refinance by a date certain (but no requirement beyond that).

-       A requirement to “apply” for refinancing (which is different from “making best efforts”) by a date certain.

-       A requirement to refinance by a date certain or within a prescribed period of time.

I have a simple plan by which we could totally change the landscape of post-divorce financial difficulties. We can stop nearly all cases of derogatory credit resulting from defaulted mortgages that were not refinanced properly.

In cases wherein the grantor is an obligor on the mortgage note (whether singularly or jointly)

1.    Require – or highly advise – that the potential grantee (being awarded the house) apply as soon as possible for financing approval. If the potential grantee applies with a competent Divorce-Lending Specialist, there is never any reason that a divorce would be finalized without a clear understanding on both sides as to the likelihood, probability or surety of the refinance transaction. There would be no guess work, no warrantless hope, no disappointments and most of all no messed up credit years later when a grantor’s credit rating is ruined and there is nothing s/he can do about it. If the parties/attorneys think that a required refinance is not equitable or advisable, the following question might bring things into perspective: If the grantee cannot qualify for financing, why does anyone imagine they can afford the indebtedness? That is, if professional underwriters and the automated systems of Fannie Mae, Freddie Mac or HUD (for FHA) cannot find confidence that a debt will be repaid, on what basis do the parties/attorneys/mediators/judges find this confidence?

2.    The attorney should receive a complete, professional assessment of the grantee’s qualifying for refinance. This should be supplied by a Divorce-Lending Specialist. The good news is that you already know one. The bad news is that I only know of one. [That will be remedied in time.] This assessment could

a.    clarify exactly what is required and what can be done for the grantee to qualify for refinancing; this can include

                                          i.    required child and/or spousal support and length of continuation

                                         ii.    precisely how to document support payments

                                        iii.    maximum buyout amounts subject to appraised value, credit scores and debt ratios. (I just saw an Owelty lien for $24,850 placed on a property that appraised for $67,000 and had an existing mortgage of $65,000 against. Somebody wasn’t paying attention).

b.    specify the expected time frame that such financing will require…how long before the deal can close

c.    in cases wherein qualifying is not probable, state when it might be probable

3.    Require – except in the most extreme of cases – that the grantee finance the awarded property into his/her own, separate liability and out of the grantor’s. Again, such extreme cases should be outlined clearly and unassailable reasons - as to why a refinance is unadvisable - stated by a qualified Divorce-Lending Specialist. If we reversed assumptions – from assuming that refinancing a debt (held jointly or in the name of the grantor) is non sequitur to the awarding of a property to assuming that refinancing that debt should be required -

There are, indeed, cases whereby awarding a property without the requirement for an immediate refinance may be warranted. But even in these cases, such unrestricted awarding (lacking the commensurate requirement to refinance) should not be indefinite. If someone cannot qualify for financing within 24 months (maybe 36 at the very most), it is irrational to assume that they have the wherewithal to make the payments. It is a foreclosure waiting to happen.

In other words, judges/courts would be doing what nearly everyone now says caused the mortgage and financial meltdown in the first place – giving loans to people who cannot afford to pay them back. [By awarding properties and simply assigning the debt, judges are effectively giving loans to people, only guaranteed by the grantor instead of the actual person required to make the payments. It is a case of “mistakes-in-tandem.”]

In divorce, there are some cases of properties that cannot be refinanced, due to market realities related to the value of properties. The mortgages are “upside-down” and the programs that the government has created to deal with these do not apply to loans wherein a borrower is being deleted from the loan. But, even in these cases, why award the property indefinitely with absolutely no requirement for the grantee to make every effort to attempt financing for as long as it takes? What about when the market and housing prices recover?
I can think of one case wherein a grantor has no reasonable expectation for the grantee to refinance. That is when the grantor has been so reckless and indigent with his treatment of credit and finances, thus adding to the disqualifying elements in a loan denial for his/her spouse, that the grantee has been placed in such untenable position that he/she could not qualify for some years to come. Not making mortgage payments for 4 months is tantamount to a foreclosure and will effectively disqualify a borrower from receiving a loan for up to three or four years and longer (some lenders require a 7 year seasoning of foreclosures). Even though credit can be repaired in time, special and egregious circumstances might dictate that such a grantor has foregone reasonable expectations of the grantee refinancing.

When a house is awarded and the grantee is not required to refinance out of the grantor’s liability, the settlement is effectively hanging a grantor out to dry in terms of his/her credit rating – all at the mercy of a person they divorced; with no end in sight, might I add. If anyone wishes to wreak havoc on a party, this is certainly a sure-fire way to do it.

Would any of us consent to be a grantor under such terms?

The Deed of Trust To Secure Assumption

It’s not uncommon that a Deed of Trust To Secure Assumption is offered the grantor. In fact, it’s nearly universal and, in my view, a very reasonable requirement (when the grantor is on the existing mortgage note). However, I have asked many attorneys if they know of instances wherein the remedies under the Deed of Trust To Secure Assumption are acted upon. I am still unaware of any cases – although I’m sure there are some. It’s economically unfeasible, generally; and, it creates an added hardship when the grantor (grantee in the DOTTSA) must take on the obligation for a previous debt (the mortgage) when he/she has most likely replaced that indebtedness with another liability (rent or mortgage payment of their own).

Neither is the specter of increased mortgage payments an argument against the requirement to refinance. Rates are a function of the market. And no citizen or client has a right to a particular price (rate) in the market. The fact that payments go up or down is based on interest rates and loan amounts; and, is irrelevant to the grantors’ reasonable expectation that debts be removed from their liability.

I hope to do something – in the way of education - to rectify this situation in general. Next article deals with the practical realities of making these transactions happen . . . or how we “turn white paper into green money.”

Thursday, March 6, 2014

On Calculating Net Equity
Tips For Family Law Attorneys – How To Calculate Net Equity In Property
Part One- The Problem

Here is something I see quite frequently in divorce settlements. (I copied this example from a recent settlement).

Marital Residence
Current Fair Market Value                 136,500.00
Current Balance as of                          102,965.00     
Net Equity                                               33,535.00     

Do you see any problems with this calculation?

In the quest for equitable settlements, most often divorce settlements rely upon an Excel spreadsheet to calculate “equity” in an asset. When it comes to residential properties, the calculation breaks down in several ways.

First of all, “equity” is not the same as cash. If two parties are splitting a checking account balance of $10,000 as of a date certain and the split is 50/50, it’s easy. There are no transactional costs (to speak of). The spreadsheet is accurate. $5,000 to John and $5,000 to Mary.

Stocks, bonds, and other liquid investment assets are the same. There are no significant transactional costs; thus, a calculator or spreadsheet works just fine.

Even retirement accounts are subject to simple math when dividing an account. The QDRO mechanizes an agreed split and only if the recipient chooses are the taxes deducted (if converting to cash).  It’s a matter of their choice about the time-value of money. So, by sending 50% of a $100,000 retirement account to a new IRA or 401(k), any diminution of funds is up to the recipient and is not a requirement of the division of assets.

But, “net equity” in a residential property is entirely different; mainly, because it’s not liquid (cash or easily redeemable investments). You cannot eat it, drive it, spend it, sleep on it or use it to buy a ticket to see the Cowboys . . . as they eat, drive, sleep or watch the Super Bowl.

Secondly, in order to convert “equity” to cash, the property (which allegedly possesses this “equity”) must be sold or financed.

Thirdly, that “equity” can disappear without its owner mismanaging it. Stocks, investments, checking and savings accounts can, in theory, be managed so that they grow in value or are protected from losses. But, if the housing market is slow or takes a down-turn as we experienced in 2008 through 2013, that equity can disappear with a “poof.”

Again, it’s clear that stocks and other investments can lose their value in their own markets as well. But, they can be protected from loss by good management.

Now, a home owner can mismanage the collateral (the actual house) for the asset – let’s say, by not caring for it and maintaining it – and thereby reduce the “net equity” since the value of the asset would decrease compared to what it otherwise would have been. But, for the most part, the home’s value is the function of a market outside the control or management of the home owner.

Fourthly, to reiterate a point made earlier, “net equity” is not as liquid as other assets. One can write a check on a checking account and easily transfer funds. One can call their investment broker and sell or buy. It may take a few hours but it can be done fairly easily. Retirement accounts are governed by rules but most can be liquidated or borrowed from in about one week at the most. Homes, where this elusive “net equity” dwells, are not so easily transacted. Moreover, until a house is sold or financed it is by no means clear even if this “net equity” can be converted to cash.

But wait a minute – what about HELOCs, Home Equity Lines of Credit? Isn’t that like immediately accessing or mobilizing a home’s “equity?” Well . . . kinda, sorta but not exactly. In the example above, a lender in Texas could only issue a line of credit of $6,235 less the closing (transactional) costs. This would be the legal maximum because of the 80% rule.

$136,500 X 80% = $109,200 is the maximum amount of loans that can be outstanding against that house; less the balance of 102,965. That leaves you a HELOC of $6235 less transactional costs. Other states are not much better. They do not restrict Fannie Mae’s or Freddie Mac’s maximum LTV limit of 85% (another 5% of the home’s value or $6,825). So, in 49 other states, the borrower could get a HELOC of $13,060. That’s a far cry from the published “net equity” of $33,535.

Owelty Financing
The better way to access a home’s equity in a divorce is the financing of a buyout via the Owelty Agreement and Lien. This allows for up to 95% LTV financing. So, let’s look at how much of that “net equity” can actually be accessed or converted to cash for a settlement.

Appraised Value                      $136,500
Max. Loan Amount (95%)        129,675
Balance on loan                         102,965
Finance Costs                                 5,000
Remaining                                 $21,710

That is, the maximum Owelty Lien that can fit in these numbers is about $20,000.

Sale of the property
Without refinancing, this leaves us with having to sell the property in order to convert this intangible “net equity” to usable money. Let’s stick with the example above. Here is what happens when a sale takes place:

Sales price                               $136,500
Balance on loan                      $102,965
Seller’s Title Policy                 $    1,070
Seller’s Other Costs                $   1,000
Realtor’s Commission 6%      $   8,190
Net Proceeds to Seller           $  23,275 (less prorated taxes)

The most optimistic estimate of equity that a homeowner can convert to cash is $23,275 in the case of a sale and possibly as little as $6,235 using a HELOC. The point is that these figures are not even close to the alleged “net equity” of $33,535. The real, accessible equity is anywhere from 18% of that figure to 70% at the very most.


So, how should a divorce settlement calculate the “net equity?”

Sell it
If the house is to be sold, no one needs to calculate the equity. Think only in terms of “net proceeds” not “net equity.” The only thing that matters is the check that is cut to the sellers at the end of the transaction after all costs have been paid.

If a house is to be refinanced in order to determine a buyout amount, I advise that the parties enter the negotiations with a rational view of market realities. Begin with the assumption that equity – by itself - has no real value. Then proceed with an appraisal that is ordered as part of a refinance process. (That’s the only appraisal that matters). Make sure a competent *Divorce-Lending Specialist is taking the loan application and processing it to completion. Then, produce a simple formula that takes into account transactional costs (aka “finance” or “closing” costs). Bear in mind that finance costs can vary quite a bit. There is no true standard of costs but there are averages. Your specialist should be able to help you with that.

Appraised Value

Before I suggest a couple of formulas to help you calculate net equity, we need to discuss Appraisals and Appraised Value (AV). The AV is the first number in the calculation and it is the hinge number upon which all others swing. (A thorough discussion of this is very important and available through my CLE-Accredited presentation “Appraisals and Property Valuation Issues in Divorce.”)

This AV number is really an opinion. In fact, that which is commonly called, simply, an appraisal is really “an appraiser’s opinion of value.” Here’s exactly what the standard appraisal form  says:

“Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser’s certification, my (our) opinion of the market value, as defined, of the real property that is the subject of this report is $______.” [emphasis mine]

Here is another statement of value taken from an appraisal that was ordered privately (not through a lender) by divorcing parties:

"Based on the degree of inspection of the subject property, as indicated below, defined Scope of Work, Statement of Assumptions and Limiting Conditions, and Appraiser’s Certifications, my (our) Opinion of the Market Value (or other specified value type), as defined herein, of the real property that is the subject of this report is: $_____, as of: [date], which is the effective date of this appraisal. If indicated above, this Opinion of Value is subject to Hypothetical Conditions and/or Extraordinary Assumptions included in this report. See attached addenda." [emphasis mine]

Grant it, the AV is the opinion of a trained and licensed professional arrived at after prescribed research and a stubborn thing called “math;” but, it is also a function of his/her considered opinion. And, this opinion could be “subject to” Hypothetical Conditions and/or Extraordinary Assumptions.”

The appraiser’s statement (above) gives clarification to the phrase C.Y.A. (Cover Your Assumptions). But, think for a moment about the advisability of using this appraisal as any sort of operative number in divorce settlements

-          The report is NOT to a lender. This means that the appraiser knows it will not be underwritten by another real-estate or finance professional.

-          How many people know how to read an appraisal and interpret the data?

-          The STATEMENT OF ASSUMPTIONS & LIMITING CONDITIONS says thatThe appraiser will not give testimony or appear in court because he or she made an appraisal of the property in question, unless specific arrangements to do so have been made beforehand.” This means that value cannot be defended in court.

-          Most importantly, if financing is required, another entirely new and different appraisal will have to be ordered by the lender with absolutely NO reference to this current appraisal.

Now, on to the calculations…

Two formulas should be considered and no speculation for future value should be taken into consideration.

Formula 1

Appraised Value less Current Loan Balance less Finance Costs = Equity

$100,000 Value less $50,000 Loan Balance less $5,000 Finance Costs = $45,000 Equity

Formula 2

95% of Appraised Value less Current Loan Balance less Finance Costs = Maximum Accessible Equity

$100,000 X 95% = $95,000 less $50,000 Loan Balance less $5,000 Finance Costs = $40,000

The logic of using 95% of the appraised value is that no homeowner is ever likely to touch the top 5% of their home’s value in almost any case – through refinance or through sale.

What’s the take-away?

The point is this: If “net equity” is entered in the same column as other assets like cash and stocks and retirement funds, the calculation should at least be rational and take into account transactional costs if not also the idea of inaccessible equity (that top 5% or so of a home’s value that can never be accessed).

If a buyout is contemplated, the task is to agree on a buyout amount. Of course, so long as the buyout must be financed, more elements must be considered than just the formula. There are limitations to financing that are affected by a borrower’s credit score and debt-to-income ratios. Again, a competent Divorce-Lending Specialist should be looking at this transaction and consulting the borrower and his/her attorney.

*Divorce-Lending Specialist. Currently, there is no certification for this specialty. When I began in 2002, there was no training or information available. No trails had been blazed. To date, it appears that there is a dearth of such mortgage professionals. No problem. Call me. Noel Cookman 817-454-4555.