Rule 11 Agreements - Part One

Rule 11 Agreements in Texas – Unexplored Territory

Part One

 

I am not sure how often Rule 11 Agreements are used in divorce proceedings in Texas; but, I have discovered a vast and untapped “market” for them – when divorcing parties require mortgage financing.

It may come as a surprise to attorneys that Rule 11 Agreement in Texas, like Owelty agreements, have a very important use that has largely been overlooked by lenders, real estate agents and legal professionals alike. In my business (of obtaining mortgage financing for divorcing parties), I am using them more and more.

For whatever other uses they have, Rule 11 Agreement are effectively “separation agreements” as far as mortgage underwriting is concerned. And that’s where the confusion comes in. Realtors and mortgage professionals have a cursory understanding of Texas law that governs marital status. Most think that there is no separation in Texas. You will see, in the first principle below, that this is a somewhat inaccurate statement as applies to mortgage underwriting and real estate transactions. At least, it leads non-attorney real estate professionals to inaccurate conclusions about the rules of their own industry.

Allow me to illustrate. I asked a group of realtors the following four questions:

1.      Can a person purchase a house while going through a divorce (i.e., before final divorce)?

2.      Can a potential buyer purchase a primary residence without their spouse’s signature on the Deed of Trust while going through a divorce (i.e., before final divorce)?

3.      Can a potential buyer get (qualify for) a mortgage while going through a divorce (i.e., before final divorce)?

4.      Can a potential buyer use child or spousal support as qualifying income to get a mortgage while going through a divorce (i.e., before final divorce)?

The answer to all four questions was overwhelmingly ¹“NO.”

The real answer to all four questions is, “YES.” And the document that makes it possible (all other qualifying factors assumed) is a Rule 11 agreement.

To be clear, no Fannie Mae, Freddie Mac, HUD or V.A. guidelines use the term “Rule 11.” It is obviously Texas-specific. But, what they describe is, in essence, a Rule 11 agreement.

Quoting from the Fannie guidelines (concerning the issue of how support income might be considered qualifying income) …

Verification of Income From Alimony or Child Support

Document that alimony or child support will continue to be paid for at least three years after the date of the mortgage application, as verified by one of the following:

• A copy of a divorce decree or separation agreement (if the divorce is not final) that indicates payment of alimony or child support and states the amount of the award and the period of time over which it will be received.

Note: If a borrower who is separated does not have a separation agreement that specifies alimony or child support payments, the lender should not consider any proposed or voluntary payments as income.

• Any other type of written legal agreement or court decree describing the payment terms for the alimony or child support.

 

The part that says “If a borrower who is separated does not have a separation agreement…” is the part that stalls mortgage professionals. They reason that since there is “no separation” in Texas, there can surely be no “separation agreement.” But, lending guidelines are insensitive to separation’s lack of legal status. They allow for such agreements. Notice that the guidelines then allow for “any other type of written legal agreement” in place of a formal “separation agreement.”

Texas lawyers immediately recognize this as a Rule 11. That’s how I discovered it. I recommended the use of an agreement typed out – as an underwriter instructed me – “on an attorney’s letterhead and signed by both attorneys.” One of my referring attorneys said, “Sure, that’s a Rule 11.” The only change we advise is that both parties sign the agreement as well.

So, under certain prescribed circumstances – as agreed by parties and specified in an executed Rule 11 Agreement – divorcing (but not yet finally divorced) parties can purchase homes, do so without their spouse’s signature at closing on the security instruments (e.g., Deed of Trust), and qualify with spousal and/or child support.


Footnotes

¹ Actually, a small minority of realtors were familiar with transactions wherein a divorcing (but not yet finally divorced) person had purchased residential real estate. But, they were clueless about any features that made such transactions possible.