I took a little “rabbit trail” last week with the Deed of Trust To Secure Assumption – what it does and does not do.
Concerning the topic, Removing Ex-Spouse From Mortgage Liability, I have one more thought that can save the day for tens of thousands of Texans each year. And, speaking of “saving the day” for Texans, I have a committee for that. The master group is The Committee to Save the World. One of the special committees (under the Master Committee) is The Select Committee to Save the Housing and Finance Market. And, of course, there is the Sub-Committee to Save Divorced Homeowners From Post-Divorce Financial Trauma. You’re on the committee, by the way.
With 75,000 divorces each year in Texas, it’s not hard to imagine that there are tens of thousands of divorced citizens each year who experience some financial trauma. I am not going to give statistics today, only anecdotal examples. And, it’s my opinion that the miracle is that there is not more financial trauma given the fact that so many settlements leave a mortgage debt undisturbed, allowing the grantor (of the property) to remain on the mortgage liability with only a court order that the grantee service the debt.
The good news is that there is a temporary solution for grantors whose mortgage debt (assigned to spouse) remains on their credit report. The common misconception is that they cannot qualify to buy another house with that debt showing up on their credit. This is not true, for the most part. At least, it’s not true so long as the ex is servicing the debt without fail.
First of all, a person’s qualifying depends upon several factors. This common misconception assumes that the borrower doesn’t have enough income to qualify with both payments. In fact, they might. Most don’t. But, some do. It’s all in the numbers.
Secondly, though, it’s not true because of a little known fact that such debt is “excluded” from the borrower’s debt ratios in a loan application so long as the divorce decree assigns the debt to the ex-spouse. (Freddie Mac rules are a bit more stringent and require, in addition, proof of payment on the part of the ex-spouse for 12 months; but, Fannie’s rules are more prevalent). This exclusion of debt is generally not available in bank financing of consumer and commercial debt. This helps to perpetuate the common misconception that the exclusion is not allowed in lending financing of mortgage debt. I know – it’s nearly counterintuitive. But, it’s true. This “exclusion” principle should never, in my view, be used to simply pass over the mortgage debt as having been resolved without refinancing. Here’s why…
These facts NEVER get the grantor “off the hook.” And, several things can go wrong. 1) If the loan defaults, the grantor has no control over the damage to his/her credit. At that point, there is no fix. The creditor does not remove a derogatory report just because the court told another party they were responsible for the payments. The damage is done – see last week’s article. 2) In certain cases, the grantor’s new lender may require proof of the pay history from the ex in order to exclude the debt from their debt ratios….try that one on for size. Even if the order required that the ex-spouse provide such documentation, think of the extra work, time and expense in actually getting these docs from the ex. Fun! 3) Lending rules can change and it’s possible that, in the future, the starry-eyed social engineers in Washington will hand down underwriting guidelines from “on high” which defy the current rules. Such nonsense is already taking place. 4) As well, lenders/investors can, on their own, adjust or change these rules. We are living in tumultuous times in terms of the ground rules shifting beneath our feet.
The list of potential negative consequences can go on and on.
It has been oft stated, in negotiations, that the grantee cannot “afford” or “qualify” to refinance the mortgage. This is often used as the single, un-challenged reason to skip to some other measure to “resolve” the issue.
Please do not take this question personally. But, if a lender (whose entire business practice depends upon their ability to determine if a borrower can and will make the house payments) has decided that they will not advance funds on a person’s loan application, why do we (consultants, loan officers, attorneys, parties, judges and mediators) consider it prudent to award a house and assign a debt to such a person?
I am sympathetic to such situations and hope to help folks who have difficulty qualifying. As I tell everyone – “I’ll stick with you until you get what you need.” But, economic reality does not adjust to my sympathies.
So what is the best practice to assure that mortgage debt will be refinanced and, thus, not appear as a liability against the grantor of a property?
Simply stated, agree or (ask the court to) order that the collateral be sold (listed for sale with all the ensuing remedies like the appointment of a receiver in case the parties cannot agree, etc.) in 6 to 24 months or so if the grantee of the property has not refinanced the debt. (See your friendly Divorce-Lending Specialist for the “or so” part). This, obviously, puts teeth into the requirement to refinance without ordering that a lender advance funds.
It’s probably true that one of the expectations is that a court may not be inclined to disrupt the children’s domicile especially if sympathies are with the parent who would otherwise be under compunction to do the financing. But, think about it! If the grantee/parent defaults on the mortgage debt, the lender feels no such sympathies and the solution is to, in fact, disrupt any resident and force them to move to more affordable housing. Economic realities are insensitive to children or adults for that matter.
We are back to the question – if a lender will not advance funds, why do we imagine payments can be made in a timely fashion?
I know there are always exceptions as each case is unique. But, if there are reasonable reasons why a grantee should be required to refinance debt, why not know and understand those reasons. Even though I make my living by doing loans, on many occasions, I have stated such reasons why it is not feasible for a grantee to refinance. I do not give legal advice, try to influence the negotiations, tell folks what they should or should not do, interfere in the attorney/client relationship. So, what do I do? Here’s an example of what I might state after taking an application, pulling credit and evaluating the possibilities of successful financing:
“The party has a recent 120-day late mortgage payment on their credit report. This effectively extends the time by which he/she can obtain financing by at least 3-4 years because it is viewed as tantamount to a foreclosure. Inasmuch as one or the other party is responsible for these late payments, it is unreasonable for that person to expect a refinance of the mortgage before that time.”
Even in this situation, a mortgage debt needn’t remain interminably upon the grantor. In other words, financing is very possible in about 3 to 4 years. It is simply a reality that a divorcing party who has substantially contributed to the degrading of another’s ability to obtain financing is probably being unreasonable to insist upon it.
In any case, you needn’t “try this at home.” You can always call and get a professional analysis along with, for the most part, a conditional approval. There is nearly always a path to successful financing.
Just call me. Yep! It’s that simple.
Thanks for reading.