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 9^th 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

817-454-4555

noel@themortgageinstitute.com

Why I Preview Drafts of the Divorce Decree - I

Why I Preview Drafts of the Divorce Decree

Part I

 

In my Assessment/Approval – my report to you about a client’s qualifications and conditions for mortgage financing – I always include the following paragraph in red

URGENT and CRITICAL

Please copy us on drafts of the decree before they are executed by the parties. We will pre-underwrite this draft to assure a smooth transaction. Pertinently, divorce decrees are universally underwritten as part of a loan file for any applicant who has been divorced. In any case, the client’s decree will most certainly be underwritten in this instance. ‘Tis better to pre-underwrite than to be caught by surprise.

The paragraph provides a brief explanation as to why I want to review the decree before its execution. And I will discuss other reasons and benefits to a divorcing borrower (immediately or in the future) in future newsletters on the subject.

The major reason I need to preview the divorce decree – and a lot of folks do not know this – is because an underwriter will read every word of it. Not only will the underwriter review it but he/she will consider everything in it as relative to the loan file.

Here’s a good example. A divorcing husband purchased a car for his soon-to-be ex-wife in his own name and credit – NOT using her name/credit to obtain the loan. In their thinking, this would help the wife qualify to refinance the mortgage in her own name, the debt not showing on her credit report. (The liability, obviously, did not appear on our borrower’s credit report). But, the proposed divorce decree assigned the debt to wife.

When I discussed this with the husband – and why the wife might not qualify with that extra debt – he eventually understood but initially had a difficult time comprehending that a debt which does not appear on a credit report still counts against the borrower.

You see, in every other situation – in normal circumstances – the only way to know what debts must be counted against the all-important debt ratio is for the lender to examine the borrower’s credit report. This couple thought they could “game the system” by simply getting a loan in the other’s name, thereby exempting it from the borrower’s credit report.

This is a major reason lenders require the entire, conformed divorce decree when underwriting a file – the detection of all debts.

And this is why I preview or PRE-underwrite the decree before its execution. As you know, I will have already been processing the loan for the client – way before every other lender wants to even take an application.

And this, my friends, is how we assure successful closings – we do not throw things to the wind and hope for the best. We give the entire settlement meticulous review and make recommendations accordingly.

Thanks for reading.

 

Noel Cookman

817-454-4555

noel@themortgageinstitute.com

What Is An Assessment in a Divorce Settlement?

One of the greatest values you can give your divorcing clients is a set of tools to implement their settlement and agreements.

Think of it this way – if your client (or opposing) is ordered to refinance the recently-awarded marital residence and include a buyout to their former spouse, how beneficial would it be if everyone in the process (clients, attorneys, the court/mediator, children) knew, in advance, that this would actually happen? What if you knew – BEFORE FINAL DIVORCE – that they could actually turn white paper (decree) into green money (buyouts, payoffs)?

Well, there’s a way to achieve that. That’s what my Assessment tells you.

In as concise a form as possible – usually less than two pages – my Assessment

1.       analyzes the situation,

2.       offers brief explanations of how mortgage finance affects the settlement (and vice versa) and

3.       makes clear recommendations for decree language and settlements.

As a note to #3, I adhere to the principle of non-interference. That is, I do not see my role as trying to affect terms of the settlement. I strongly believe that this is between the parties and their attorneys. My concern is to accommodate, as much as possible, the agreements that are contemplated. However, certain features of a settlement will either allow or disallow loan approval. Therefore, some tweaking is sometimes called for.

Here’s an example. A wife wishes to be awarded the marital residence under the proviso that she refinance its mortgage and, thus, relieve the husband of its credit liability. She needs support income to qualify for this mortgage. The wife tells me that spousal support is contemplated at $2,000 per month for two years. Well, one of the mortgage rules is that such income must continue for 3 or more years after loan closing. So I ask, “can you live with $1,333 per month for 3 years?” If so, all $1,333/month is qualifying income while $0 of the $2,000/month could be counted as her qualifying income (because it does not extend for 3 years or more after loan closing). There are usually a few other adjustments to be made but that’s the general idea.

Thus, I have not affected the actual dollar amount that is to be paid/received; I have simply recommended that it be structured in such a way as to allow the client to get financing. And, incidentally, the payer benefits as well when he needs financing – instead of $2,000/month counting against his debt ratio, now only $1,333 counts against it. It’s almost always a win-win.

Also, I have to advise regarding (what I call) limits to financing. That is, while I never tell a party “you should get this much or they should pay this much,” I do have to say one of two things

-          “It will take this many dollars to qualify” or

-          “For that amount of support, your loan amount cannot exceed $X.”

This is all in a concise Assessment. And by the way, the Assessment is as fluid as a divorce settlement process is. That is, it requires updating and refinement. This is because everything about a divorce settlement affects loan approval. That means I have to update the Assessment.

Here’s how you get my dynamic, award-winning, stupendous (well, pretty important anyway) Assessment for your case: Tell your client to call me. Or ask opposing to have their client call me. The one who needs financing (whether refinancing or purchasing in the foreseeable future) needs to make that call.

“Hi Noel; my attorney gave me your number” is the beginning of a dramatically and substantially better settlement with the advantage of my Assessment about

TURNING WHITE PAPER INTO GREEN MONEY!

 

Noel Cookman

817-454-4555

noel@themortgageinstitute.com