In the previous blog, I discussed why every word in a borrower’s decree is read, reviewed and underwritten.
The assignment of debt was the key illustration and element in the first reason why I PRE-underwrite (review prior to finalization of divorce) drafts of divorce decrees. Too much debt assignment can disqualify a potential borrower and trigger a loan denial – no matter what appears on their credit report.
Here’s a second reason I preview divorce decrees:
A decree provides underwrite-able data for loan approvals. Here’s one example of “underwrite-able data.”
Forgetting the relaxed underwriting standards of the late 1990’s through 2008, it is a nearly universal axiom that lenders must judge the risk level of a loan by a set of fixed parameters – namely: credit patterns, the collateral-property (especially the LTV or Loan To Value ratio), assets, debts and income.
Of paramount importance in this matrix of qualifying is the borrower’s income; specifically, their debt/income ratio.
But, there is more than the immediately measurable income. For example, an applicant may be making $5,000 per month but she may, in fact, be self-employed as a contract laborer with only a few months remaining on the contract. Or, an entrepreneur may be making $25,000 per month in his new business but have very little experience in running his own enterprise. How prudent would it be for a lender not to consider these factors in their lending decision? This judgment is a measure of “income stability.” In other words, how likely is it that the income will continue? The loan, after all, is for a long period of time – up to 30 years – during which the lender must receive consistent installment payments.
So, what does the lender seek in terms of income stability? For how long might a lender seek to assure that their borrower will receive enough income to make these payments? For whatever reason, 3 years of continued income (whether by employment or by whatever means) is the standard underwrite-able expectation.
Here’s the problem. Only one person knows the future and He usually doesn’t spell it out in readily discernable, layman’s language. And, as everyone knows, mortgage lenders work for the devil so God isn’t inclined to tell them much anyway.
Seriously, lenders only have a few methods of predicting the likelihood of continued income. One is past performance. The metric for that is 2 years’ experience in the same line of work. There is another metric for child support and alimony which I discuss below. Another measurement is the employer’s statement. But, employers are rarely willing to make such statements for obvious reasons. The Fannie Mae form – Verification of Employment – still has a section that asks “Probability of Continued Employment?” Most employers leave it blank or enter “Does not comment.” And a lender cannot force a commitment one way or the other from an employer.
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There is one instance wherein the lender can predict – very accurately – the likelihood of continuance of income: Divorce. Think about it. A divorce decree tells a lender exactly how long support is ordered to continue….to the day, month and year.
So that we don’t get lost in nuances of underwriting standards – snooze time – let’s review. I PRE-underwrite divorce decrees because they reveal to the lender exactly how long support income will continue and, therefore, how much of that income is considered “qualifying” for loan approval purposes.
I said that there was a different metric for “past performance” when it comes to child or spousal support. When it comes to employment, the look-back is 2 years. But, when documenting support income, the requirement is only 3 months (for FHA financing) or 6 months (for conventional financing).
Here’s an example of how PRE-underwriting can save the day for a divorcing borrower.
Jane had documented receipt of child support (for her 10, 12 and 14 year old children) for the required 6 months. We planned to close the loan in July. Her 14 year old would turn 15 in June and was currently in the 9th grade. As is usually the case, when the oldest child turns 18 or graduates from high school, support for the remaining two children drop (in this case from $2250/month to $1725/month as an example only). She had planned on qualifying with $2250/month; but, because of the three year continuance can only use the $1725/month as qualifying income.
We advised that support continue at the higher amount for an additional 2 months (a difference of only $1050) and that accommodations be made to adjust for the difference in the division of assets. The paying husband/father just agreed to do it in order to help the wife/mother qualify so not adjustments had to be made. The point is that these minor adjustments could be made and that they made all the difference between qualifying for a mortgage and not.
This happened only because 1) we knew how to apply the rules for qualifying income and 2) we previewed the decree, offering suggestions for minor but NOT substantial changes in the settlement.
Such a solution cannot occur when divorcing clients do what virtually all mortgage lenders tell them to do – “get your divorce, bring us the decree and let’s see what we can do.”
My friends, that laziness and carelessness is a formula for disasters aka loan denials. There is a better way. That’s what I do.
Thanks for reading.