Quick Q&A: Can my client buy a house if he’s obligated on another house debt?

From: Very Good Central Texas Lawyer
Sent: Wednesday, May 8, 2019 8:31:55 AM
To: noel@themortgageinstitute.com
Subject: Question

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

 

Noel writes:

Sort of.

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

 

Noel wrote:

No longer. They now have you….and me. ? Why in the world would they not assign debt commensurate with awarding of associated property. SMH!

Noel Cookman
The Mortgage Institute
972-724-2881
Noel@TheMortgageInstitute.com

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