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 21stcentury 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 willingnessto 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't...how 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.