Every attorney with whom I frequently work knows that there is rarely if ever any excuse to leave a joint debt UN-REFINANCED. Especially if that debt is the home mortgage.
When one party is awarded the house but the other party is liable for its debt, why would ANY agreement, decree, court, mediator or attorney EVER agree to let that debt go un-refinanced?
To do so means that, until that debt is paid off – often after decades – the obligor-party’s entire credit rating is subject to the ability and willingness of their ex-spouse to timely pay the debt. Or, as I cavalierly-colloquially say – they’re NOT really divorced…it doesn’t matter what the courthouse records say. They are as bound together as they ever were.
Remember that co-signers and co-borrowers are as obligated on a loan as much as the signer or borrower. There is no effective difference. You sign the note – you obligate yourself.
Let’s go over the excuses that clients and lawyers often give for not demanding that the property awardee also becomes the sole obligor…because that’s what they are – EXCUSES, NOT reasons. At least, not reasonable reasons. And, I will help you overcome those excuses from opposing.
The first key to overcome these excuses is our mindset. If we think that we are at the mercy of the other party’s demands, then we will have no stamina to make certain demands of our own. Remember this, your departing (from-the-house) spouse-client is actually SELLING his/her interest in the house. It may be for $0 – which is evidenced with a simple Special Warranty Deed; or, it may be for a dollar amount – which is a Special Warranty Deed with Encumbrance for Owelty of Partition. But, if you BUY a house from a seller, I can promise that you will either pay cash or you will produce the money via a closed loan transaction. But the seller will not accept any excuse for non-payment. You just don’t get the house. The seller has no interest in your excuses. And, the reason is not just because the seller is making a profit by selling their home; it’s because they have to pay off the underlying mortgage on their home. That debt HAS to be satisfied.
Excuse #1: The awarded party cannot qualify to get a mortgage.
Response Excuse to #1: So, let the other awarded party – at least – try; or, just sell the house. Because, here’s what that means – if they cannot get a mortgage loan to refinance the debt, they can’t afford the house and will likely default on the debt. But, there’s an even more solution-oriented response – unless I (Noel Cookman) say they cannot qualify, you do not know for sure. Now, I realize that’s a bold statement. But, I have proved it time and again for the better part of two decades. I do things that other lenders and loan officers – even other divorce “expert” loan officers - cannot do…or just WILL NOT do. I have a secret sauce. Really. Some of you have seen it in action. I’ll leave that right there because I am not going to explain my secret sauce on the world wide web. All I will tell you is that it is not magic – it’s math!
Excuse #2: He/She can’t do it but we don’t want to upset the kids so just leave things the way they are.
Response to Excuse #2: Oh really. The bank that forecloses on the home-owner because the payments are in default doesn’t care about the kids. They care about getting their money…just like you do. So, if anyone really cares about the kids, take action – reasonable action – NOW.
Excuse #3: They have a low rate that the current market can’t match or beat.
Response to Excuse #3: Tough. Do it anyway. That’s not the other party’s problem. The current rate environment changes nothing about persistent debt obligations. One tactic is that the departing party could pay (in cash or in reduced buyout receipts) any discount points to get the interest rate down to match the current rate (in an environment of higher interest rates). That’s a lot fairer than just letting a debt obligation hang out there with no hope of resolution.
Excuse #4: It’s inconvenient.
Response to Excuse #4: Whaaa, whaaa, whaaa.
Excuse #5: They already tried.
Response to Excuse #5: So. They haven’t tried with me. See #1. Do this - it is not uncommon in the real estate sales world: Many times, a realtor will require that a potential buyer pre-qualify with the realtor’s preferred lender just so they can get the approval from a reliable source. They will tell the potential buyer (usually through their agent) “you don’t have to use my preferred lender but, I do require that you pre-qualify with my trusted lender before I accept the contract and effectively remove my listing from the market.” In fact, even if they say they are already approved with a lender, you may want to tell them the same thing. Here's why. Most lenders do not predict the divorce settlement and just pull a credit report and calculate ratios based on what the borrower tells them. They do not know to ask questions like 1) will you pay or receive support, 2) what debts might you be assigned that we do not see on the credit report, 3) is there a buyout involved? 4) what is the asset division? And, many more relevant questions that affect loan approvals.
Excuse #6: Their bank already said “no.”
Response to Excuse #6: So. See Response to Excuse #5. Besides, most banks or mortgage companies – other than me - do not plan ahead. Just because they cannot get a loan now does not mean that they will not qualify in the future. Hardly anyone needs more than 24 months to qualify IF they are EVER going to qualify. So, at least write in the agreement that after two years the house will be sold if it’s not refinanced. And, most banks do not know how to do what we do. They don’t know how to be creative and figure it out. For example, we will tell you if the client can qualify immediately (so that they can close right after final divorce), in a few months or several months or in 2 years. At least, everyone can know and make decisions based on factual, reliable information.
Excuse #7: My all-time favorite – the other side just won’t agree.
Response to Excuse #7: Walk out. Take it to trial and pray that you get in front of a judge who has read my material. There is no logical or financial reason to NOT require the sole holder of an asset to also solely hold the debt obligation. As to whether there is some legal argument to allow a debt for an asset to remain with the party who NO LONGER HAS THE ASSET – outside of that obligor’s willful agreement - someone please tell me. I suppose that IN VERY RARE OCCASSIONS, it’s possible that some case could be made for such. But, in perpetuity? And, without the full agreement of the current obligor? And, without the awarded spouse truly making every reasonable attempt to get financing…with me? Really?
At the very least, write into the agreement that if the awarded party defaults on the mortgage payment (one late payment is a default), the house is immediately put with a receiver. Don’t provide that the party can petition for a receiver – go ahead and have one pre-appointed. If you don’t have a list of good, reliable realtors who understand real estate and divorce, I can provide you with one. It’s small right now but it’s growing as I train more and more realtors.
THIS MIGHT BE THE STRONGEST REASON OF ALL TO REQUIRE REFINANCING THE MORTGAGE DEBT. When the decree starts out “in the interest of the children,” but instead provides for loss to the marital estate or at least a lack of remedy to restore or preserve the marital estate, who wins? Certainly not the children. The loss to their parents’ estate - because of a defaulted mortgage - is incalculable but easily involves tens of thousands of dollars. It’s not inconceivable that, over the course of years, the diminishment of that estate could be in the hundreds of thousands of dollars for middle-income and upper middle-income homeowners.
One more VERY IMPORTANT thing. Prepare for mediation. If your client wants to be awarded the property, assume that they will need mortgage loan approval. Get them in contact with me as soon as possible. Our goal is that you walk in to mediation with an Assessment/Approval that states plainly that the loan is approved, underwritten and ready to go. At the very least, our report will tell the awarded party exactly what is required to obtain financing and how long it will take.
If the other side seeks to be awarded the house, tell opposing that this will be fine but you need to see a bona fide approval from a lender – preferably me, Noel Cookman. You can use the old “you don’t have to use Noel; but, I need an approval from a lender that we trust” spiel.
Noel Cookman; Noel@TheMortgageInstitute.com; 972-724-2881