Wednesday, October 21, 2015

Why Divorcing Clients Need to Pay/Receive Support Immediately and Not Wait Until Final Divorce


You (lawyers) live in the world of judgments, orders and agreements. It’s somewhat precise. My world is somewhat precise as well but with different rules (or points of precision).

For example, when it comes to support (spousal and/or child), you think of what is ordered or agreed….and the exact date when it starts and stops.

I, on the other hand, think in terms of documentation. Of course, I have to live with what is ordered/agreed – every word of a decree is reviewed and underwritten in a loan application. But, remember – I am involved during the process of divorce, not just after everything is agreed.

This is important because support can be engineered in your settlements so as to accommodate mortgage financing without violating the essence of the agreement.

For instance, when it comes to support, here are the mortgage rules. Generally speaking, in order for support income to be considered qualifying income, we must document (remember that word) that the support has been received for 6 consecutive months and that it will continue for 3 or more years.

Most folks – even mortgage professionals – assume that this means the borrower cannot qualify with support income until at least 6 months after divorce. *But, this is not what the guidelines say. Fannie, HUD and VA only require documentation of the support, not its court order.

This means that two divorcing parties can, by good faith agreement, begin to exchange support payments. I say “exchange” because here’s how it looks: Let’s say the wife is trying to qualify to refinance the mortgage so husband can be released of its liability and move ahead in life without this “monkey on his back.” And, let’s say that the wife needs child or spousal support in order to qualify for this mortgage. And, for illustration purposes, let’s say that the house payment is $1,000/month, the utilities are $300, and groceries are $500/month. Since husband has been the main breadwinner, he has been paying these bills from his own account or from a joint account (even though the wife may have been, in fact, writing the checks or managing the account). Let’s also assume that the contemplated support is $1800/month. My recommendation is that wife establish her own sole/separate checking account (just as she will surely do by final divorce); and that husband begin support payments of $1800/month which wife will then use to pay the bills. Husband doesn’t actually pay anything extra (until support is ordered) so there is no loss to husband. All is whole so long as the couple “juggles” the accounts so as to create a paper trail.

You will quickly see that this is not “gaming” the system. It is, in fact, mirroring the post-divorce reality….this is how it’s going to be.  It’s the closest thing to reality that an underwriter can possibly see as she evaluates the applicant’s ability to repay the mortgage loan.

Most importantly, the documentation is established.

Here’s one more important distinction that lawyers may not usually conceive – it does not matter on what day of the month the support is paid so long as it is paid within the month for which the support is due. That’s right. You usually think of support as due on the 1st and the 15th or by whatever dates are standard. But, mortgage guidelines are generally unconcerned about those dates and think in terms of months more than in terms of days of the month. I know it sounds counterintuitive to the world of orders and agreements. But, here’s how it can work:

At the end of October, a couple can begin paying/exchanging support immediately. So long as the funds move before the end of the month, October counts as the first month. Conceivably, our borrower could qualify for financing near the end of February (the 5th month) if ex-spouse pays March’s payment early. (This is a judgment call and doesn’t always work but it can under certain circumstances). This means that 4 months after we direct the couple to exchange support payments, the borrower can be closing her loan….having established a SIX MONTH pay history.

Cool, eh?

While most people assume that the support cannot begin until after divorce or until after temporary orders. But, with a literal stroke of a pen, divorcing parties can create their own loan qualifying many months earlier than by waiting until final divorce.

Let’s review.
1.  As soon as a couple seriously contemplates divorce, the non-custodial parent should begin paying (really, exchanging) support.
2. Payments should be documented as coming from payer’s sole/separate account and paid into payee’s sole/separate account.
3. Amount should be at least that which is contemplated; and, payments must be made in consecutive months...no skipped months.
4.“Juggling” the funds (so that no loss is incurred and that both parties are whole) is left to the couple. Most folks can figure it out fairly easily if they want to.



Summary

Borrowers can use support income to qualify for mortgage financing if certain documentation rules are followed. The support does not necessarily have to be ordered. But, a pay history must be developed.

A competent Divorce-Lending Specialist should advise. But, generally, here is how to do it.

1. Payer should pay from his/her own sole/separate account.
2. Payee should deposit into his/her own sole/separate account.
3. Make sure payments are made in consecutive months – no missing monthly payments.
4. Payments do not have to be made by a certain date within the month so long as payment is made before month end.



*Freddie Mac’s guidelines require that the support be ordered (as in a decree). But, this order can be by temp orders, Rule 11 Agreement, MSA, etc. Moreover, Freddie Mac is used much less frequently than Fannie Mae and I, personally, only use it to accommodate other particular nuances in a loan application.


Thanks for reading.

Noel Cookman
817-454-4555
noel@themortgageinstitute.com

Tuesday, October 13, 2015

How to Specify Dates for Closing and Funding a Buyout


Sometimes, deals blow up because the lender is not able to meet deadlines set forth in a divorce settlement. Financial loss. Unhappy clients. Additional litigation. No one wins in these situations.

I can’t say that I’ve seen it all but after 13 years specializing in Divorce-Lending, I’ve seen enough to create a response concerning how grantees (of awarded properties) are required to pay buyouts to ex-spouses. I’m speaking mostly of the time elements that are specified in a decree such as “Respondent to pay $50,000 by Nov. 1, 2015” or “Petitioner to pay $50,000 within 60 days of entry of this decree.”

I have a few suggestions that I believe will accommodate your settlements and avoid unhappy clients because dates are missed or because the feat, itself, is impossible.

An example: We are just closing a transaction wherein the MSA required payment of grantor’s interest within 60 days OF THE DATE OF THE MSA, not from the date of final divorce. Since an Owelty cannot be financed until after final divorce (not merely after a judge says “I’m granting this divorce” and answers “yes” to the party’s question “your honor, does this mean I’m divorced”), the date of the MSA is irrelevant to the actual closing and funding of any Owelty buyout – only the date of entry of the final divorce decree affects when this Owelty buyout can occur.

Well, the drafting attorney – the attorney for the grantor (who was to receive a buyout) – had not drafted the decree as of about 2 weeks prior to the 60-day time limit. I could see that there was no way we could meet the deadline. Opposing attorney (my customer’s attorney) took up the task of drafting; but, even then, there was no way to meet the deadline. My customer’s attorney (who had referred said customer to me) was a talented negotiator and bought us some extra time, by extending the deadline to a more reasonable date in the final decree. That - I’m sure you caught this – was a change to an IRREVOCABLE AGREEMENT. Nifty trick if you can pull it off. Great legal work; and, I assume, kudos to the other side that agreed to it and helped to accommodate a realistic time table.

This true account has the elements of my suggestions below. So, I won’t tease you and wait until the final suggestion to give you the most important element, the critical factor in writing agreements and decrees that “turn white paper into green money.” Here it is:


1.    Get a Divorce-Lending Specialist working on this ASAP. That is - Refer your client to me. Or have opposing refer their client to me.  I would say refer them to any good, competent, experienced, top-of-the-line Divorce-Lending Specialist. But, as much as I would like to say that there are plenty of Divorce-Lending Specialists out there, that statement is not true. Is this blatant commercialism and capitalist opportunism on my part. Sure…

But, there is a real reason for this important step. Without the consultation of a specialist, how does anyone (parties, attorneys, judges, mediators, neutral professionals in collaborative, et al) have any idea IF the buyout can be financed at all let alone if it can transpire by ANY particular date? I cannot emphasize this enough! At least when assets are split in a liquid account, everyone can see that there are X dollars here and this party can be awarded X minus Y and the other can be awarded Y. But, when financing is required, who is able to assure the parties/attorneys/court that the grantee can, in fact, be granted a mortgage loan?

Here’s why I am very confident that most cases have been settled (many times with unrealistic deadlines) and no one in the divorce action (parties, attorneys, mediators/judges) is confident of financing: hardly any lender even takes a loan application until the divorce is final, let alone delivers approval statements prior to final divorce. They could if they wanted to but they just don’t know what to do with an unresolved (not final) divorce case. I, on the other hand, know exactly what to do. I get the borrower prepared and processed; and, I deliver to them and their attorney an approval statement with precise recommendations concerning what elements must be present in order to close their loan and “turn white paper into green money.”


2.    Never specify a deadline for a buyout before final divorce. As I stated earlier, no Owelty can be financed until after final divorce. I was going to specify that the Owelty could not be financed as a purchase money transaction until after final divorce, leaving open the possibility that it could be financed as a Texas Home Equity loan. But, that’s not true because an Owelty cannot even be established until final divorce. An Owelty is established in the same action (document, The Special Warranty Deed with Encumbrance for Owelty of Partition) that divests a party of his/her interest in the property. Given community property provisions, this is established ONLY in the final decree of divorce.

I realize that, sometimes, the expectation and earnest position of opposing is that the buyout simply must happen before final divorce or on the date of final entry of the decree. While buyouts certainly can be paid prior to final divorce, my point is that they cannot be financed until after final divorce. Remember, I don’t give legal advice – I’m not a lawyer. I state limits and conditions to financing at the intersection of divorce and mortgage lending.

(I am leaving alone the debate about partitioning of properties during the marriage because, in my world – the world of mortgage underwriting and title insurance – final divorce is still required in order to finance Owelties). If the day ever comes when lenders and title insurers finance/insure Owelties before final divorce – trust me – I will know and I’ll be on that like stink on a skunk.


3.    Give it enough time after final divorce for the borrower to fully qualify. I suggest always allowing at least 45 days. But, this only works if the loan is already in process. Here again, the Divorce-Lending Specialist will tell you how much time. As we pre-process our divorcing customer’s loans, the actual “red tape” and clerical work required after final divorce amounts to very few hours plus a few days because of new regulations. In reality, it could take several days. So, for the most part, we are closing our loans within a couple of weeks after final divorce. But, here are some reasons why it could take longer.

a.    The borrower may need to repair or enhance their credit. The Divorce-Lending Specialist will advise as to how much time. Sometimes, we have recommended up to two years on cases wherein credit profiles were in dire straits. Most often, much less time is required.

b.    The borrower may need to establish a “pay history” of receiving child or spousal support. The standard time required now is 6 months (for FHA and Conventional financing). The Divorce-Lending Specialist can tell you – almost to the day – when the client’s loan can close.

c.    The borrower may need more time on the job. After significant gaps in employment (for example, a wife/mother who has been out of the job market for several years), it is becoming standard that lenders require a back-to-work period of 6 months. If the borrower is entering a new line of work for which he/she has no education or if the borrower is starting a business and will be self-employed, a two year history of income is required. There are several factors. And the astute Divorce-Lending Specialist will predict and advise regarding this.

d.    The collateral property may need seasoning time to increase in value to a required dollar amount in order to be financed. While no one can predict values with pinpoint accuracy, the fact is some properties don’t have enough value to be financed in the present; and, the only hope of having them financed is through an increase in value….which takes time.

e.    If Texas Home Equity financing has been procured within the 12 months preceding, the refinance of this equity mortgage cannot take place until at least 12 months have passed from that prior transaction.


By working with me, you won't be in the dark about either the IF or the WHEN.
 
You now have the advantage of knowing that an agreed buyout is not merely a fair and equitable division of property but a feat that can be accomplished…and you know by what particular date it will actually take place – when we turn white paper into green money.

Thanks for your support. Find and follow me on Periscope. Noel_Cookman 

Noel Cookman
817-454-4555
noel@themortgageinstitute.com