From: Very Good Central Texas Lawyer
Sent: Wednesday, May 8, 2019 8:31:55 AM
Good morning Noel,
If wife was awarded the house in the decree and husband signs a special warranty deed to her, can husband buy his own house and get financing even though he is still on the mortgage but gave up his interest in the house. I should know the answer to that but I’m having a brain fart morning.
Hope you’re doing well,
Very Fine Lawyer in Central Texas
1. It's actually the assignment of the mortgage debt to wife that allows that debt to be excluded from his qualifying ratios; [see below]
2. His ownership of another property (or debt for the same) in any case would not - in itself - prohibit his purchase of an additional one; neither does his conveying his interest to his ex-wife affect his qualifying for a new home purchase.
So, there are two issues here. One is the qualifying related to debts which appear on his credit report. The other is title or ownership. Some lenders actually do place limits on the number of properties applicants own before agreeing to lend money on an additional one. But, that number is usually around 10. Still, it's not a legal limitation on property ownership - just a lenders and agency (Fannie, Freddie, HUD) guidelines which affect mortgage financing of said properties.
A, sort of, third issue is also mentioned - let me rephrase it. Does the signing of a Special Warranty Deed to ex-wife, relieve the former owner of the existing mortgage debt in the practical exercise of qualifying for a new loan? The answer to that is a clear "no." The Special Warranty Deed does nothing to relieve debt. It deals only with the conveyancing of (a person's) interest in the subject property. One might sign away his interest in a property a thousand times; he will still be obligated on any promissory note he signed to a lender which advanced funds for the purchase of that property. The lender retains another Deed - the one that says, "you pay, you stay."
3. He obviously needs to use me since not all lenders play by this rule. Plus, I'm just a wonderful person. Ha.
*The "Below" Part: Excludable debt in mortgage qualifying seems mysterious and enigmatic. It need not be. There are a couple of guidelines which allow a debt to be excluded in a new mortgage application. The first - and most useful in our world of family law - is that a debt can be excluded in a borrower's qualifying ratios if that debt has been assigned to another party in a divorce decree or some other "legal document" like an MSA (Mediated Settlement Agreement) or a Rule 11 Agreement. So, nearly ALWAYS, any divorce decree should assign the mortgage debt specifically to the party which is awarded the house and/or generically with that phrase that assigns debts associated with "any property awarded herein..."
Here's another example of an excludable debt. Let's say you have "co-signed" for your daughter to buy a car. You tell her "You're going to get a job and pay the payments AND the insurance differential if I co-sign for this debt. [Call it a DEBT so that they can hear it loud and clear.]" Don't let your daughter pay you in cash. This is the biggest mistake I see in debts which should otherwise be excludable - cash payments. Make your daughter open a checking account and require her to write a REAL check to the auto creditor EVERY freakin' month. Not just EVERY month - EVERY FREAKIN' month. What I meant to say was "EVERY MONTH...WITHOUT FAIL." Even if you help out one month, you should give her the cash, let her deposit it into her account and STILL write the check from HER account. Then, you require her to provide you with a copy of the cancelled check or payment transaction each and every month.
If you provide that documentation to me (as your mortgage lender), I will exclude that debt from your qualifying ratios. You will have documented that another party is indeed paying that debt and you are not having to pay it. I will need to document payments for either the past 12 months or, if less than 12 months, since the inception of the account (probably for at least 4-6 months).
Very Fine Central Texas Lawyer writes back:
Well their divorce was done a few years ago and they never did anything other than award her the house in the decree. They're sending me the decree. I see a lot of sloppy handling of houses in decrees in this county....
Very Fine Central Texas Lawyer
No longer. They now have you….and me. ? Why in the world would they not assign debt commensurate with awarding of associated property. SMH!
The Mortgage Institute
Got this email in the middle of the night. I love these questions and the learning opportunity they afford.
From: Divorcing in Washington State
Sent: Thursday, June 6, 2019
Subject: Read your blog. Need advice on divorce buyout
Noel, I read your blog and am reaching out because I am going through a very contentious divorce settlement. Let me give you the bullet points.
My ex-spouse wants to buy me out and keep the house which is fine by me. However right as we were about to sign and finalize a buyout of $40,000, she pulled out last minute after applying to refinance the loan. The appraisal the bank gave was far lower than the independent one we had done a month or so earlier. So now she is reconsidering how much the house is actually worth and is influencing her decision to negotiate lower.
Independent appraisal done in April valued the home at $550,000
Bank refinance Appraisal done just last week valued the home at $500,000
On Zillow it's $555,000
On Redfin it's $530,000
The relevant balance when it comes to our remaining mortgage as it pertains to me is $436,000
So we did the thing you mentioned a lot of people do, took these numbers and subtracted.
550,000 - 436,000= 114,000 in net equity
divided in half =57,000 (my share)
I took it down to $40,000 to factor in hypothetical closing costs, brokers fees, etc. I thought this number was more than reasonable but I would love to get your opinion on how to zero in on the most accurate number for the net equity of the house.
I would argue that the banks appraisal is not true market value for what we would sell the house for, they will always appraise on the lower end because it's in their best interest. So, do you have any insight as to what is closer to the true value and net equity of the home and how we can reconcile the huge differences in these numbers. Also if you have any advice on what a fair and equitable buyout would be given the numbers I just gave you. I live in Washington a community [property] state. I appreciate what you do!
I have attached the two separate appraisals that were taken. One is from the Bank she is refinancing the loan from. The other is from an independent appraiser that she picked out herself.
Divorced in Washington State
Dear Divorced in Washington State:
Thanks for writing. I love addressing these questions and conundrums (or is that conundra?).
Only one of these is an appraisal – the one which client is the bank. The other is a CMA (Comparative Market Analysis). It is not an appraisal. Both are opinions. But, one is the opinion of a professional appraiser as a report to a lender to which it has an obligation to make a fair report. The realtor’s opinion is the price at which she hopes to list the property for sale but, in no manner, reports as an actual value. That’s one reason customers pay hundreds of dollars for one while the other is free.
In raw terms, only the lender’s appraisal has significance in terms of what can be financed. In other words, Jane Smith [not her real name] may be a wonderful person but the bank/lender is lending their money and Ms. Smith is not.
I do not mean to be flippant. I am just giving you the reality of the situation through the eyes of a lender.
As well, it is actually NOT in the bank’s best interest to appraise a property lower than it is truly worth. This harms their balance sheet on the asset side and, if they sell the loan on the secondary market – and virtually every mortgage lender prepares their loans so that they can sell those loans on the secondary market – it is to the benefit to have a defensible appraisal at the highest rationally-calculated value…it means that loan has a stronger equity position or performance potential – that is to say, the more equity a homeowner has in their property, the less likely they are to default on the mortgage debt.
As a foot note to the preceding paragraph, the appraiser is no longer the “bank’s appraiser.” Home Value Code of Conduct and the Dodd-Frank Wall Street Reform Act which incorporated this measure into its new 2,300+ page bill (2nd in size only to the Obamacare Affordable Care Act….if you care to know) built a “fire-wall” of sorts between the bank/lender and the appraiser. That wall of separation comes in the form of an appraisal management company (AMC). This effectively means that the bank has no influence over the appraisers’ statements of opinion. Communication between the bank and the appraiser is nearly a crime – it is a crime if the bank tries to influence the appraiser’s opinion of value. You can imagine the pro’s and con’s of this provision. So, it’s fairly certain that the bank is not manipulating the report of value.
But, the central issue – in my view – is one of negotiation and value. Value is not what an appraiser says an asset is worth; it is the highest price that a rational person will pay for that asset as sold to them by another rational seller.
So, you’re in a negotiation. Here is a strategy that I recommend be used with prudence and good timing and ONLY if it can be done sincerely (i.e., without bluffing) in divorce-related buy-outs. If your wife is offering a certain price that you think is too low based on your assessment of the value, ask her “do you truly believe that this is a fair price.” Let’s say she is offering $50,000 as a buyout to you. (I’m literally just pulling a number out of the air so don’t take the math literally). And, let’s say that you believe $75,000 is more reasonable given your assessment of value. So, if your wife believes that $50,000 is fair, turn the tables. Say “I’ll take the house and buy you out for $55,000…that’s more than a fair price for you because you get a $5,000 bonus…it’s a no-brainer, right?”
Now, she has committed to what she claims is a fair price; and, you are working within her framework of opinion of value.
However, if you just simply do not want the house at a price of $55,000 for her equity (let alone $75,000) you have to deal with the reality of value to you – for example, if you have reason to believe that the antique bicycle in your garage is worth $200 even though it needs restoration, you might let it go in a yard sale because you don’t want the hassle of restoring it, storing it or moving it. You are effectively “paying” $100 to offload the hassle of restoring/storing/moving the bicycle.
The key is not to play your hand too early and reveal that you think $75,000 is a fair price. She just might turn the tables on you.
So, here is the proper way to calculate equity in my opinion. First establish the difference between equity and ACCESSIBLE EQUITY. This is based on the idea that if your house sells for $100,000 and you owe $50,000, you will not walk away with $50,000. There are transactional costs (title policy, realtor commissions, filing fees, etc.). As well, if you refinance in a buyout, the conventional lender will lend no more than 95% of a home's value. So, you can rarely if ever "access" the entire value. So, I use the 95% method which almost mirrors the math if an owner sells their property.
Here is the ACCESSIBLE EQUITY
Bank's/Lender's appraised value $500,000 X 95% = $475,000
Less the mortgage balance of $436,000 = $39,000
Less the finance costs (let's just pretend it's 1999 and call it $5,000) = $34,000.
Then, divide it how you please. The math is simple at that point.
That's not to your advantage I understand. But, even if you do not factor the 95% (keep in mind that there is no law that enunciates the formula) you get
Bank's/Lender's appraised value $500,000
Less the mortgage balance of $436,000 = $64,000
Less the finance costs of (again, let's pretend) $5,000 = 59,000
Divide it how you please.
Hope this helps even though the news is probably not to your liking. And, the numbers are hugely different depending on the VALUE. The fact is, we have to live with the realities of financiers - how much money they will lend; as well as the rules by which these lenders must play.
Thanks for writing.
America’s Premier Divorce-Lending Specialist
PLEASE DO NOT FINALIZE YOUR DIVORCE
UNTIL I HAVE PREVIEWED THE DECREE
601 W. NW Highway † Suite 200 † Grapevine, TX 76051