Wednesday, April 15, 2015

Removing Ex-Spouses From Mortgage Liability – Part III

The Deed of Trust to Secure Assumption – What it does and does not do....and how to solve a conundrum

Let’s understand once and for all what a Deed of Trust to Secure Assumption (DTSA) is and is NOT.

I got in trouble while giving my course on Owelties by saying, the DTSA, while always a good idea, is not a substitute for the grantee refinancing the property and does not really resolve anything. “Don’t listen to him,” the senior attorney was heard to say, “always require the DTSA.” She was correct. And since I wasn’t in disagreement on the matter, I suppose I was as well.

However, I have to make the point again – because clients do not just deal with legal and logical matters in their divorce, they deal with credit issues in perpetuity. And a DTSA does not protect credit. Its intent may be to protect the credit of the grantor, but it does no such a thing. In fact, the DTSA can only be triggered if and when the grantee’s credit has already been damaged! Think about it. Unless the grantee of a DTSA has significant enough resources at any given point in time, the DTSA may not even protect the collateral interest it alleges to protect.

The DTSA gives its grantee (usually the same person as the grantor of the Special Warranty Deed) a mechanism whereby he/she can be spared TOTAL ruination (spell check wanted to change that to “urination”) of credit. But, there is no automatic protection of credit. In fact – and it is worthy of repetition - the single and only event that triggers the DTSA is a default on credit. So, before the grantee takes a single action to foreclose on their DTSA, a late payment has been recorded on his/her credit. One may think this a small thing but, in reality, it most often disqualifies a borrower from obtaining a mortgage for at least 6 months and easily up to 12 months.

It gets worse. I used to tell my customers that a DTSA meant that if their ex-spouse was late on a payment, the grantor (of the Special Warranty Deed; grantee of the DTSA) could knock on the front door, kick their ex-spouse to the curb and take possession of the house. You and I both know that it’s not that simple.

Here’s what happens. There is a foreclosure process that must be followed. This process could easily take months; and, unsophisticated citizens are completely unaware of that process which means days, weeks, months can pass before the required paper work is filed and action is taken. Meanwhile, during these intervening weeks/months, even more late payments will “hit” the grantor’s credit report. If the mortgage becomes “4 months down,” the grantor will be assumed to have had a foreclosure on their credit report, whether or not the lender actually forecloses.

Moreover, the DTSA’s grantee may not even be aware that his credit is damaged until months have passed. The notices for late payments are sent to the property address.

At this point, the client (who thought his interest and credit was “protected”) cannot obtain conventional financing for at least 4 year or FHA financing for 3….and that’s only if their credit scores recover in the intervening years. As I pointed out above, at the least, one late mortgage payment on an applicant’s credit report will delay a home purchase/refinance for 12 months or, at least, 6 months (in some FHA loans so long as there has been no other late payments in the preceding 6 months).

Sure the Deed of Trust to Secure Assumption protects a grantee’s interest by giving them the right to retake the collateral. But, if your client is the grantee of a DTSA, that document puts your client in the foreclosure business. There is a common misconception that banks enjoy foreclosing on properties they have financed or that they actually want to foreclose. This is wholly untrue. Banks and lenders outsource the foreclosure process because it’s complicated, expensive but mostly because foreclosing is not the business they want to conduct. The first thing they do is sell it at auction at a fire sale price. The few properties that have a “ton of equity” do not make up for the many for which they take a loss. Ask yourself how many of your clients actually want to be in the foreclosure business . . . on properties for which they have advanced their own money.

The DTSA creates a “contingent liability.” In many ways, a contingent liability is worse than a standard liability because you never know if and when you will have to service the debt. Imagine if you have to manage your finances that way – “My monthly expenses are $2,000 per month but they might be $3,500….don’t really know.”

Here’s another way to understand what the DTSA does. It provides an opportunity which, when combined with a sizeable amount of money and ongoing expense (house payments, probably the largest monthly expense in most folks’ budget), can begin to remedy a dire situation created by another party (one’s ex-spouse). People get divorced for a reason….and, it’s usually not because they want to pay for their ex-spouse’s living expenses beyond ordered support.

Here’s the rub from my view: As negotiators sit around the table and discuss these issues, as one attorney told me, the grantor (of the DTSA) will often offer the DTSA as a way to equalize the fact that they allegedly cannot finance the property in their own name. It’s treated as tit for tat. Hopefully, we all see that being granted the DTSA doesn’t put a thing in the plus column for the grantee.

Right about now, you are probably thinking “Good grief, Cookman. We know all this. We need to know how to solve the problem, not just understand it more clearly.” And, here is the simplest, most straightforward, fair solution:

Always (with so few exceptions that we could still say “always”) require the party awarded a financed property to (re)finance that debt out of the grantor’s liability. I say it this way because, many times, the option is for a friend or relative of the awarded party to perform the financing but the key feature is that the grantor is effectively relieved of the debt. And, set a time limit on it - I can advise how long for each individual case; and, it will rarely ever be more than 24 months – with the provision for the property’s sale if financing has not transpired. This means that you will probably never again have to use the phrase “[party] will make every good faith effort to refinance the mortgage….

The only way to properly and effectively do this is for the awarded party to call me….and call me sooner than later… in, before final divorce and very soon after filing petition if at all possible. Most lenders will tell your clients, “get your divorce finalized, bring us the decree and let’s see what we can do.” This is devastating to a majority of cases and transactions. And there is no good reason why lenders should wait until terms are chiseled in stone. I don’t wait. But, the fact is, most of them are not sure what to do during the process. On the other hand, I make sure that you get approvals (with specific conditions and an outline of the structure for your decrees) before final divorce. That way, there are no questions and there is no wondering what will happen to the debt.

Boom yow! You and I just saved the world….or at least an important part of it for a whole lot of people.

Wednesday, April 8, 2015

Removing Ex-Spouses From Mortgage Liability – Part II

I left you, last newsletter, with the cliff hanger…

“Next week, Part II – Is there ever a reason why the grantee (of a property mortgaged by the grantor) should not be required to refinance the debt in order to extinguish the grantor’s liability?”

Well, I’ve thought about it. Actually, I’ve thought about it a lot more than just this past week. So, here is Part II. And here’s my answer:

Only if the grantor wishes to remain on the mortgage loan in perpetuity until the loan is paid in full. Let me put it this way – only if an ex-spouse wants to retain a debt for a property in which he/she no longer retains any ownership interest (or to which he/she has no real access).

But the most commonly cited reason for not requiring a spouse to refinance the mortgage debt is

The spouse cannot qualify for a mortgage on her//his own.

Set aside, for the moment, the question – how do you know that the spouse cannot qualify? And, let’s deal with the obvious…..

Let me ask it this way: if you know that the spouse cannot qualify to make the payments, what makes you think that the ex-spouse will make the payments?

The most common retort to that question is, “well, they can’t qualify to get a mortgage but we know they can make the payments [for whatever reason].”

You’re hired. I can double your salary as an underwriter if you “know” when people will and will not make their mortgage payments. Especially if you can do it without underwriting that person’s income, credit, pay history, debts, etc. Underwriting takes hours and the fees go from $750 to $1,600; and, the only important question is – will this borrower make the payments?

Even though I have originated and closed mortgage loans for 15 years – this entire 21st century thus far (sounds like a long time, eh) – I cannot determine if a borrower will make payments; moreover, I am not allowed to – only an underwriter, on behalf of a lender advancing funds, can make that judgment.

The second most commonly cited reason for not requiring a spouse to refinance the mortgage debt is

The grantee’s credit is inferior and, therefore, they cannot qualify for a mortgage loan.

Where do people get this information? Only a qualified mortgage professional (lender) can issue this judgment. Even then, the parties and the attorney have to be aware that some mortgage professionals can be enticed to deliver a loan denial by an applicant who tells the loan originator “I don’t really want to refinance so I need you to deliver a loan denial letter.” It’s counterintuitive, I know – people seeking a loan denial when everyone assumes that applicants want a loan approval. But, it happens more than you think.

Even in the case of an applicant who cannot qualify for a loan in the present, why would anyone assume that this is the case in perpetuity? And if one assumes that the grantee will never qualify for a mortgage, why would the settlement just assume that the grantee can or will make the payments? After all, lenders who live and die by accurate underwriting are testifying that by numerous loan products and types, they will not lend.

The good news is that no lender denies loans into the future. That’s the flip side of the fact that lenders will not approve loans into the future. That is, loan approvals have an expiration date of a few months and even then, loan documents have to be up-to-date and the lender must verify that the borrower’s income and asset status has remained as it was at application.

Before I offer a solution, I need to tell you about one more lending principle. Can and will. That is, lenders concentrate on a borrower’s ability and willingness to repay debt. They may have one but not the other – and, therefore, they would be a poor risk. An applicant may have a perfect credit rating but if he has no income, how does that facilitate repayment of debt? Conversely, a borrower may have a 10% debt:income ratio (rarely seen and about 35 – 40 points below maximum thresholds) but a poor credit history of repaying debt. This person is, likewise, a poor credit risk.

So, when making your own determinations about a grantor’s debt hanging “out there” at the mercy of the grantee, at least ask the question “what is the grantee’s ability and willingness to repay debt in a timely fashion….and how can we predict this?

So here is my recommendation…

Solution. Given all the factors in divorce settlements, I recommend that all awarded properties (with mortgage liabilities in the name of the grantor) be refinanced within 24 months (maybe 30 months) or listed for sale.

Where do I get this 24-month figure? My experience tells me two important things. First, almost any applicant with damaged credit can self-repair their credit rating within 2 years. Secondly, employment requires a two-year same-line-of-work history. So, starting from scratch in a new line of work, the applicant should be able to build the required work history in 24 months. But, this is rare – that a divorcing applicant has absolutely no work history. Mostly, they have “job gaps” wherein a wife was a stay-at-home wife/mother. In these cases, 6 months back-to-work is usually enough “work history” for the lender.

I realize that there are exceptions. And the good news is that you don’t have to wonder – you can always get a professional evaluation of a client’s qualifications for mortgage financing. All you have to do is call.

In any case, leaving a debt in place for a grantor in a divorce settlement is almost a guaranty that there will be great difficulties in the future and that, one day, I'll get a call from a divorced customer who says "my ex was supposed to make the payment but they haven' can I make them refinance this out of my name?" I hate to tell them - "you can't" or "you might get a judge to order it again; so, how does that help you?" or "maybe a judge will order the sale of the home but I really have no idea - I'm not even a lawyer let alone the judge." It's not a fun conversation.

Next week, I’ll discuss the Deed of Trust to Secure Assumption; what it does and does NOT do; what really happens if a DTSA is triggered; why it is not a tit-for-tat exchange for a grantee’s unwillingness or incapacity to refinance the mortgage.

Thanks for reading. I’m honored that you do.

Noel Cookman

Removing Ex-Spouses From Mortgage Liability – Part I

Subtitle: Do you have to refinance in order to remove a spouse from the liability?
Sub Subtitle: The New York Times gives more bad advice
Sub Title to the Sub Subtitle: The Elusive Assumption of Liability

Here's some very bad advice from the NYT:

Why don’t they have me write their stuff? Geez!

The title reads “Avoiding Refinancing Costs After Divorce” as if the reader is going to discover some way to avoid refinance costs after…well, it’s in the title.

Of course, when you read the “fine print” (the actual text of the article), you see that there are caveats and disclaimers like “The problem is that not all lenders or mortgage servicers offer this option” and “Still, a lender or servicer generally has no obligation to release one of the borrowers.” No kidding Sherlock.

Here’s one example of other erroneous information in the article:

“And if you are “under water,” and owe more on the mortgage than the home is currently worth, this process is not an option.”

How would the lender know if the homeowner is “underwater?” The lender would have to obtain an appraisal in order to know this. These cost $475 - $700. Sounds an awful lot like someone’s doing a refinance transaction complete with fees, etc.  But, the article starts off by saying “There is another, little-known option that can avoid refinancing and its costs…” Oh yeah? News Flash: Lenders don’t just go out and purchase appraisals at their cost so that they can release one of their borrowers from a loan. Of course, the article goes on to say that there actually are other costs; maybe not published costs at the level of refinancing costs but there are costs. Still, if you know anything about mortgage financing, you can detect these little discrepancies and chunks of misinformation.

Here’s the problem with those “assumption” programs and “release of liability” programs that promise to remove a spouse from the debt (promissory note, mortgage note): the borrower never gets a satisfaction of lien or the original note in the mail. Remember the old “mortgage-burning” ceremonies? Well, you won’t have one of those.

So when folks say that the lender is promising that they will take them “off of the mortgage” I always tell them to ask, “will you send me the original promissory note and a release or satisfaction of lien” not merely a “release of liability of borrower?”

One of the other problems with this elusive option (other than the fact that it IS elusive), is the length of time that it takes; and, the fact that there are no guarantees before final divorce.

There is a better way. My whole concept and model – virtually unique to us – is that loan approvals (for refinances or purchases) can be generated before final divorce. In the case of a refinance with an Owelty lien buyout, the divorce must be final before the loan closes. But, that does not preclude delivery of loan approval before final divorce.

You will not get this “approval” in the elusive and enigmatic (i.e. unregulated to the point of being cryptic with no guarantees for anyone) assumption or “release of liability.” It easily takes 90 days and the process cannot truly begin until final divorce.

Good luck with that.

If you are representing the grantor, ask yourself, what document can I put in their file that assures me that they are totally relieved of the liability? You might have a letter that says “Dear M’am, you are released of the liability.” Given the fact that lenders are devils, few judges would probably rule against the “borrower / former home-owner.” But what about the lender who purchased the loan after such release of liability letter was issued? That lender/servicer will have the original promissory note in the file. Moreover, the loan file itself becomes a different product on the secondary market if some previous servicer has “released” a borrower of the liability.

There is only one way for a promissory note to “go away.” It has to be paid in full; as in a refinance or a sales transaction.

Next week, Part II – Is there ever a reason why the grantee (of a property mortgaged by the grantor) should not be required to refinance the debt in order to extinguish the grantor’s liability? I’m thinking….I’m thinking….
Thanks for reading.
Noel Cookman

Thursday, March 19, 2015

Exactly How An Owelty Lien Works III


Elements in an Owelty Lien

Last week, we began discussing the elements in a divorce settlement that create an Owelty – a financeable Owelty lien. I took a short "rabbit trail" to point out certain factors that would derail the proper creation of an Owelty and thus make a buyout that would be severely limited or outright impossible. It’s worth a second look.

Without each of the required elements, there is no Owelty. And here’s what that means for the client/homeowner who is seeking financing of that buyout:  

1.    Those Texas Equity limitations will be triggered, giving the borrower access to at least 15% less of his/her home’s value. (General max Loan To Value ratio in lending is 95%; legal max for cash outs in Texas is 80%; thus the 15% differential).

2.    There are no alternatives such as FHA in financing. “Cash outs” are conventional loans only; no FHA “cash out” financing allowed in Texas. This is a real problem for those who do not qualify for conventional financing. FHA accommodates a lot of borrowers who might otherwise not be able to finance a home. FHA allows lower credit scores, higher debt ratios (in many cases), slightly damaged credit, comparatively higher LTV (Loan To Value) ratios including a max LTV ratio of 96.5% (vs. the general cap of 95% in conventional). So, if the client cannot qualify for conventional financing, they are just out of luck.

3.    If parties were expecting a buyout and none is forthcoming, post-divorce trauma. So what if the decree requires the refinance and buyout by a date certain (and, in my opinion, it always should)? What happens when that date threshold is crossed and the refinance/buyout hasn’t happened? The most common remedies I’ve seen are a) forced sale (which is what the agreement was obviously trying to avoid), b) assumption by the original grantor….good luck with that and c) judge hits her gavel a bit harder on the desk, slaps grantee on the wrist, and orders the grantee to abide by the order. Motions to enforce are hardly helpful unless the grantor has just been indigent and is more highly motived by an additional trip to the courthouse. But, that’s not the situation we have. No court can order a lender to advance funds…at least not in this situation. Additionally, the failure to create a proper Owelty lien can result in a demand to sell the property by the ex-spouse or the appointment of a receiver to force the sale. As title attorney Kelly Bierig says, “most likely the parties don’t get along anyways, so once you add the stress of not being able to pay off the ex-spouse, the problems between the [former] spouses will only get worse.”

There is, of course, a cure for these problems. Make sure the client calls me before final divorce. But, that’s another paragraph.

Now, it’s time for the secret sauce - the actual creation of an Owelty agreement and lien. Those specific elements must exist in order for an Owelty lien to be properly established.

1.    Correct legal description (as opposed to merely the legal or common address) in the decree and in the Special Warranty Deed.

2.    Clear awarding of the property to the grantee, subject only to the Owelty interest.

3.    Dollar amount of the grantor’s “interest.” Yes, formulas can be used. But, generally you’re asking for confusion and ultimately the two ex-spouses will have to agree to the buyout amount as a dollar figure. Sometimes, there is no other way. But, sooner or later, the Special Warranty Deed with Encumbrance for Owelty of Partition will have to record a dollar amount.

4.    Use the word “interest” – and avoid using the word “equity” - when specifying the grantor’s agreement for a buyout. It’s not an automatic disqualifier; but, the Owelty does not represent equity; it represents “interest.”

One more tip. This one is about timing. When calendar dates are established as deadlines for the refinancing and/or buyout of an ex-spouse’s interest, make sure - in advance - that these deadlines are workable. The simplest way to do that is for the client to call me and get started on a refinance loan as soon as possible. But, that’s another paragraph.

Sometimes, when a calendar date is missed, the ability of the borrower to obtain financing is put in jeopardy. The simplest way to avoid this jeopardy is for the client to call me as soon as possible. But, that’s another paragraph.

Just one more tip. Never file a Special Warranty Deed before or without an encumbrance for Owelty of Partition. Once a spouse has granted their interest (effectively at $0 when a simple SWD – without Owelty - is filed), it is nearly impossible to change that and create, in reverse, an Owelty interest. Let’s just go ahead and say it – it ain’t gonna happen. I can show you how to make sure that never happens but, that’s another paragraph.

Now, for that paragraph…We’re out of time for today’s newsletter. Please stay tuned for more next week.

Thanks for reading.

Noel Cookman

Wednesday, March 11, 2015

Exactly How An Owelty Lien Works II

Elements in an Owelty Lien

I am going to show the basic elements that create an Owelty interest and, thus, a financeable lien on a homestead property. But first things first.
Always remember the foundational axiom - it costs you nothing for me (and my title gurus) to review your decree (or Special Warranty Deed w/ Encumbrance for Owelty) to make sure that proper language has created this enigmatic Owelty lien. If I am doing the financing for the grantee/party anyway, I have to know if this interest has been created. Otherwise, I might not be able to close the transaction – I might not be able to TURN WHITE PAPER INTO GREEN MONEY.

Watch out. It’s possible to create an Owelty interest (lien) without using the word “Owelty” in your decree. But, it’s also possible to use the word “Owelty” and still not create a valid Owelty interest (lien).

You live in a world that hinges on pronouncements and judgments from the courts. While the practical world of mortgage finance is subject to all sorts of laws, regulations and court judgments, lenders are generally not subject to a court requiring them to advance funds (except for the laws which require that they do it fairly without discrimination on account of race, color, religion, etc.). For this reason, I do not ask a judge if a decree has properly created an Owelty lien; I ask the lender. And, since the lender relies upon the title insurance company to insure the new transaction as having a valid lien, I go straight to the title insurance underwriters, all of whom are attorneys, for an answer to this question:

Do you see a valid Owelty lien in this decree/agreement; and, will you insure it as a valid lien against the homestead of the borrower (thus allowing a purchase money transaction verses a Texas Equity loan transaction)?

First, however, it is instructive to understand what factors disqualify a spouse’s (grantor’s) interest from being financed as a valid lien against the homestead. In other words, what factors derail efforts to create a financeable Owelty interest in a settlement?

1.    The existing mortgage is a Texas Equity 50(a)(6) and therefore must be refinanced as a Texas Equity 50(a)(6). [This is the common reference to a Texas “cash out” or Texas Equity loan – same thing.] Of course, the newly created Owelty lien could stand alone and separate from the existing equity lien. But, if the newly refinanced loan includes the existing equity loan – that is, if they are “rolled together” and refinanced as one loan – then the new loan must be a Texas Equity 50(a)(6) loan.

2.    As a practical matter, from the above situation when the Owelty lien is valid and is filed in addition to an existing equity lien, very few lenders will finance just the Owelty lien – that is, turn it into cash payment to the grantor. This may change. But for now, I would not recommend that a grantee, having been awarded the homestead residence, count on a lender financing just the Owelty lien behind an existing Texas Equity lien. Again, there are a few lenders that will finance this Owelty lien without Texas Equity (Cash Out) triggers but they are few in number and not so easy to find.

3.    The buyout is not created in the divorce settlement as an Owelty interest. If, for example, the decree states that husband owes wife $X for her “equity” in the house but does not award the house to husband subject to an Owelty interest in favor of the wife, the decree has created a debt in favor of the wife but not an interest in the property. This is a grey area for title underwriters. Some will see “equitable” interest as “Owelty” interest. Others may not. It depends on the language and the underwriter.

4.    The legal description is not included in the awarding of the property or is missing from the Special Warranty Deed with Encumbrance for Owelty of Partition. In some occasions, this can be corrected, generally if the Special Warranty Deed has not already been filed. The divorce decree should reference a complete and accurate lot/block or metes and bounds legal description; not merely a property address.

5.    Improper awarding/divesting. One ex-spouse should be awarded the subject property and the other ex-spouse should be divested of his/her interest in the property.

Next week - those actual “elements” that are required for the constituting of a financeable Owelty lien.


Wednesday, March 4, 2015

Exactly How An Owelty Lien Works I

Perhaps no other topic that I address triggers the interest amongst family law attorneys as does the famous Owelty lien. I think I know why. It’s a bit of a mystery. But, why is it a mystery? Lawyers are known for their ability to understand complicated and complex issues and to, not only make sense of them but, argue them before a court.

The mystery is made somewhat more clear by the Texas Constitution Article 16, §50, (a) which allows
(3) an owelty of partition imposed against the entirety of the property by a court order or by a written agreement of the parties to the partition, including a debt of one spouse in favor of the other spouse resulting from a division or an award of a family homestead in a divorce proceeding;

I hope to clarify what may be somewhat unclear and mysterious about the Owelty lien.
This “Owelty of Partition” performs two very important functions:

1.    It secures the interest of the grantor in the awarding of a family homestead. This is the same way a lender secures its interest in a property when it advances money for its purchase or refinance (which is a renewal and extension of the “purchase money”). Lenders secure their interest with a Deed of Trust. The divorce settlement secures the grantor’s interest with a deed as well; a Special Warranty Deed with Encumbrance for Owelty of Partition, to be specific.

2.    Most importantly for our purposes, it allows the financing of that lien to be performed without relying on the restrictive and, sometimes, disqualifying features of the Texas Home Equity loan. In other words, for a qualified borrower, it allows us to TURN WHITE PAPER INTO GREEN MONEY.

This finance-ability of the grantor’s interest is critical in Texas because of the equity financing laws. (More on that next week). It’s critical in all other 49 states as well but even more so in Texas. In 49 states, Fannie Mae and Freddie Mac underwriting guidelines set the maximum LTV (Loan To Value) ratio at 85% when “cashing out.” State laws do not regulate equity financing in these states – as I said, underwriting guidelines do. Texas is different. The maximum LTV ratio is set by law at 80%.

Now, Fannie and Freddie may raise their maximum LTV ratio (in cash out transactions) to 90%. In fact, until just after the financial meltdown of 2008, Fannie’s max LTV for cash outs was 90%. But, state laws do not address these matters. The market and consequent underwriting standards govern these matters.

Here’s the kicker. Owelty financing is not “cash out” financing. The maximum LTV ratio is not set by state law in such a case. It is controlled by the market and underwriting standards. And that standard for LTV maximums is 95%. This means that a borrower can access 15% more of their home’s value if they avoid “cashing out” and, wisely, employ the Owelty lien for the buyout to their ex-spouse.

There are other favorable elements to Owelty financing which do not exist in equity or cash-out financing. I will discuss these in the coming articles.

Wednesday, February 18, 2015

Why I Preview Drafts of the Divorce Decree - Part II

This Is Why It Is Important For Me To Preview Drafts of the Divorce Decree

Last week, I discussed why every word in a borrower’s decree is read, reviewed and underwritten. The assignment of debt was the key illustration and element in the first reason why I PRE-underwrite (review prior to finalization of divorce) drafts of divorce decrees. Too much debt assignment can disqualify a potential borrower and trigger a loan denial – no matter what appears on their credit report.

Here’s a second reason I preview divorce decrees:

A decree provides underwrite-able data for loan approvals. Here’s one example of “underwrite-able data.”

Qualifying Income
Forgetting the relaxed underwriting standards of the late 1990’s through 2008, it is a nearly universal axiom that lenders must judge the risk level of a loan by a set of fixed parameters – namely: credit patterns, the collateral-property (especially the LTV or Loan To Value ratio), assets, debts and income.

Of paramount importance in this matrix is the borrower’s income; specifically, their debt/income ratio.

But, there is more than the immediately measurable income. For example, an applicant may be making $5,000 per month but she may, in fact, be self-employed as a contract laborer with only a few months remaining on the contract. Or, an entrepreneur may be making $25,000 per month in his new business but have very little experience in running his own enterprise. How prudent would it be for a lender not to consider these factors in their lending decision? This judgment is a measure of “income stability.” In other words, how likely is it that the income will continue? The loan, after all, is for a long period of time – up to 30 years – during which the lender must receive consistent installment payments.

So, what does the lender seek in terms of income stability? For how long might a lender seek to assure that their borrower will receive enough income to make these payments? For whatever reason, 3 years of continued income (whether by employment or by whatever means) is the standard underwrite-able expectation.

Here’s the problem. Only one person knows the future and He usually doesn’t spell it out in readily discernable, layman’s language. And, as everyone knows, mortgage lenders work for the devil so God isn’t inclined to tell them much anyway.

Seriously, lenders only have a few methods of predicting the likelihood of continued income. One is past performance. The metric for that is 2 years’ experience in the same line of work. There is another metric for child support and alimony which I discuss below. Another measurement is the employer’s statement.  But, employers are rarely willing to make such statements for obvious reasons. The Fannie Mae form – Verification of Employment – still has a section that asks “Probability of Continued Employment?” Most employers leave it blank or enter “Does not comment.” And a lender cannot force a commitment one way or the other from an employer.

There is one instance wherein the lender can predict – very accurately – the likelihood of continuance of income: Divorce. Think about it. A divorce decree tells a lender exactly how long support is ordered to continue….to the day, month and year.

So that we don’t get lost in nuances of underwriting standards – snooze time – let’s review. I PRE-underwrite divorce decrees because they reveal to the lender exactly how long support income will continue and, therefore, how much of that income is considered “qualifying” for loan approval purposes.

I said that there was a different metric for “past performance” when it comes to child or spousal support. When it comes to employment, the look-back is 2 years. But, when documenting support income, the requirement is only 3 months (for FHA financing) or 6 months (for conventional financing).

Here’s an example of how PRE-underwriting can save the day for a divorcing borrower.

Jane had documented receipt of child support (for her 10, 12 and 14 year old children) for the required 6 months. We planned to close the loan in July. Her 14 year old would turn 15 in June and was currently in the 9th grade. As is usually the case, when the oldest child turns 18 or graduates from high school, support for the remaining two children drop (in this case from $2250/month to $1725/month as an example only). She had planned on qualifying with $2250/month; but, because of the three year continuance can only use the $1725/month as qualifying income.

We advised that support continue at the higher amount for an additional 2 months (a difference of only $1050) and that accommodations be made to adjust for the difference in the division of assets. The paying husband/father just agreed to do it in order to help the wife/mother qualify so not adjustments had to be made. The point is that these minor adjustments could be made and that they made all the difference between qualifying for a mortgage and not.

This happened only because 1) we knew how to apply the rules for qualifying income and 2) we previewed the decree, offering suggestions for minor but NOT substantial changes in the settlement.

Such a solution cannot occur when divorcing clients do what virtually all mortgage lenders tell them to do – “get your divorce, bring us the decree and let’s see what we can do.”

My friends, that method is a formula for disasters and loan denials. There is a better way. That’s what I do.

Thanks for reading.

Noel Cookman