5 Tips That Will Set You Apart
As A Family Law Attorney
If you
include some or all of these 5 elements into your divorce settlements, you will
set yourself apart from the thousands of family law attorneys in Texas who do
not know these principles of mortgage qualifying. Yet, there is no “down side”
to applying what I am about to tell you. Moreover, no one is saying these
things to family law attorneys. We at The Mortgage Institute apply these
principles in the context of a specific case wherein a client is actually qualifying,
real-time, for a mortgage transaction. (These include, especially, refinances
to remove a spouse from the mortgage obligation, refinancing to include a
buyout to an ex-spouse and purchasing a new home using support as qualifying income,
et al).
Of course
there is a disclaimer – DO NOT TRY THIS AT HOME. You can actually describe and
discuss these principles in meetings to the benefit of all concerned. But, as
in all of mortgage qualifying, your client needs a specific
Assessment/Approval with recommendations for the settlement. You can call or
write me for that.
1. First, structure income as support
income wherever possible. You will see (#3) that, in the mortgage
world, there is a difference between income and qualifying income. And, certain
rules of documentation apply. Whereas child or spousal support requires a pay history
of 3-6 months, receipt of payments from a “note” or “payout” requires a
12-month pay history. In a recent case, the agreement was for one spouse to pay
$3,000/month in child support and $5,000 in a payout over time for the other
spouse’s interest in a company. Mortgage guidelines require a longer pay
history for the payout of the “note” (12 months) than they do for child support
(3-6 months). So, while the spouse is receiving $8,000 each month, her qualifying
income is only $3,000/month (after the required history of payments has been
received and documented).
2. Secondly, get the clients to begin support payments IMMEDIATELY if at
all possible. You will see (in #3) that a pay history must be developed. So why
would a husband, for example, want to
begin paying child support or – gasp – spousal support before final
divorce or before/without some order from the court (vis a vis a final decree
of divorce or other orders)? It’s really straight-forward – that husband wishes
for his wife to refinance the mortgage in order to remove it from his
liability, perhaps to roll in a buyout to him of an agreed amount or for her to
be able to purchase a home nearby for their children’s wellbeing. These are
personal reasons why it is in the best interest of all concerned. But, how could a payer manage to begin “supporting”
his/her own children and spouse when, many times, they are already doing this
by making the mortgage payments and buying the groceries? Actually, it’s easier
than one might think. If, for example, a husband will be paying child and/or
spousal support to his wife and she will be refinancing the mortgage into her
own name and liability, he can begin support payments to her and she can, in
turn, make the current mortgage payments and buy the groceries with her new
income. As the colloquialism goes, “it’s six one and half-dozen the other.”
This is more than “gaming the system.” It’s creating a documented paper trail
that shows the husband’s ability and willingness to make support payments – a real
key in mortgage qualifying. Here’s a sub-tip: Make sure that the payer pays
from their sole/separate bank account into the payee’s sole/separate bank
account. Payments to or from joint accounts do not count.
3. Thirdly, remember the 3/36 or 6/36 rule. The 3 and the 6 represent
months. For FHA loans, a “pay history” of 3 months of support payments must be
documented. For conventional (aka Fannie Mae or Freddie Mac) – generally preferred
– the requirement is more stringent, 6 months. The borrower must have received
3 months (FHA) or 6 months (conventional) of support income in order for that
amount to be considered “qualifying income.” But, that’s not all. The second
number – the 36 – represents the number of months which the support income must
continue after loan closing. Note that this is after loan closing, not after final divorce.
This is critical because when an attorney thinks of “continuance” they are generally
thinking of how long some provision may continue after its start date or final
divorce. Mortgage guidelines apply to the date on which the loan closes. One more
thing – 35 months will not suffice. It must be 36 or more months remaining in
the support payment schedule. Yes – it’s that tight. There are some variations –
none which are more lenient – to this rule. About one year ago, conventional
financing guidelines changed from requiring 3 months to now requiring 6 months
of pay history. The 3 year (or 36 months) rule has been standard for many years
now and also guides other types of income. For example, for wage-earner
borrowers, there is the same expectation for 3 or more years of employment. The
standard Verification of Employment form has a box for “Probability of
Continued Employment.” Most employers avoid answering that question for obvious
reasons. But, if there is a definite end to employment (as in the case of a
wage earner who is also under a contract with the employer) that is stated as
earlier than 3 years after projected loan closing, the applicant’s income
cannot be considered as “qualifying.”
4. Fourthly, convert assets to an income stream when there is a potential
need for the recipient to qualify (with support income) for a mortgage. In
higher net worth divorces, there is often a transfer or division of financial
assets to “equalize” the property settlement. While such an agreement may
satisfy a logical agreement to split assets, it often leaves the recipient of
such largesse without qualifying income and, therefore, without the ability to
obtain their own financing. How many times has this happened? Two attorneys,
two clients and a couple of ancillary personnel are seated around a large
conference room. One attorney says, concerning opposing client, “Well, we’re giving her $300,000, the house
is worth at least a $1,000,000 and the mortgage is only $100,000; any bank would
be happy to have that loan.” Well, maybe so. But, after January 1, 2014
(see my blog on the CFPB’s new rules) it will be virtually illegal to make that
loan without the client having their own, separate income from some other
source. And even now, there would be no standard (FHA or conventional) mortgage
available for that scenario. Why? No income. (Actually, $300,000 can possibly
be considered as $833/month – 1/360th of $300,000. But, that income
wouldn’t service the taxes on such a property). But, by dividing $300,000 into,
let’s say 46 months, the qualifying
income could be about $6,520/month. Now, we something in the range of
qualifying for a real mortgage.
5. Never rely on what you’ve heard “on the street” or what an amateur advises. Always
call to verify. Call me, have your client call me, have the other attorney call
me – but call. Even though I am giving you these tips – even outlined as
principles – no tip or principle is as important as involving a professional
Divorce-Mortgage Specialist. And the earlier someone calls the better for
everyone. Guidelines are in a constant state of flux. And all lenders “layer”
their own guidelines on top of FHA/VA/Fannie/Freddie guidelines.
I’ve given
some general guidelines which could be subject to change but have
remained in their present form for quite a while. If you had to memorize only
one of these tips – make it #5. Always call. I’ll work it out.
Noel can be reached at noel@themortgageinstitute.com or 817-454-4555.
