Divorce And Home Mortgage Lending

Jeff McGinnis MetLife Home Loans 1100 Olive Way, Suite 1001 Seattle, WA 98101 206-283-LOAN (5626) [email protected] www.mcginnismortgage.com

Family Law Questions: November 2008 Thank you to those who have participated in providing questions for the group. These have been excellent questions. I hope to dispel some myths and provide you with accurate working information. I see this document as a reference guide for your practice with regards to mortgage lending. It will change and grow as additional questions come to light. Please send me questions or requests for clarity and I will add the answers to this document on a regular basis. I must preface these answers by saying I will use standard and acceptable Fannie Mae, FHA, and “investor” guidelines known today. Using experience and actual cases I will bring to light as many exceptions to underwriting manuals for your knowledge. Also, every lending and divorce situation is unique. There is a very great likelihood that one of these situations may come up and the answer may be totally different given the specific loan file. 1. Can I refinance using maintenance as a source of income? Answer: Yes, you can. The rules for Fannie Mae state that if there is 12 months of history of payment of the spousal support AND there is proof in the decree stating three years of continuance, the spousal support may be used as income to qualify. Exception: I have a case right now where the underwriting findings from Fannie Mae allowed for THREE months of historical proof AND three years of continuance. In December we will have the historical proof, but may or may not have three years of continuance depending upon how the proceedings pan out. Advisory Note: A consultation with a mortgage advisor can help a client determine the exact underwriting standards that they would be subject to given their credit, employment, and equity position. Many family law professionals appreciate having this knowledge prior to mediation, collaboration, or trial. Example: Bob & Jane are going through a divorce. Jane will want to purchase a home after the divorce is final. Her attorney, knowing she will need three years of continuing spousal support in order for her to qualify for a home loan, negotiates three years and six months of support. The additional six months will give Jane time to qualify for a mortgage and find a home. 2. Can I buy a new house if I am still on the note to the marital home? Answer: Yes you can. Fannie Mae guidelines state the mortgage debt that is awarded to the exspouse in the decree does not need to be counted in debt to income calculations as soon as the divorce is final. A client may also qualify for a loan prior to the final decree if the client qualifies for both payments. Exception: If the loan is a Jumbo Loan (loan amounts over $417,000) ALL bets are off right now. While there are good jumbo loans with good interest rates, they come with different rules. One lender may allow for standard Fannie Mae rules another may not. Advisory Note: It is not advisable for a spouse to remain on the marital home mortgage for too long as it has a potential for damage to credit. In this season we may see it necessary for the exspouse to remain on the marital mortgage until such time as values return. A best effort to remove the spouse from the marital mortgage is ideal. Consulting with a mortgage and real estate professional can help the client determine the best course of action.

3. How will my spouse’s spending habits (usually bad) affect my credit rating? Answer: The spouse’s spending habits will affect the credit rating to the degree that the accounts or collections are joint accounts. If the accounts are joint, they will positively or negatively affect both parties. Exception: None to my knowledge. Advisory Note: Having a client speak with a mortgage professional early in the process will determine their credit situation. If the credit is poor and they are early on in the process, a referral to an excellent credit specialist to help them improve their score while they are going through the divorce proceedings. In addition, there are excellent handouts on the five areas that affect credit scores if the client is more inclined for self-help. 4. What are the ramifications of having the ex-spouse still on the mortgage, even though the house has been quitclaimed to the ex and/or how can the ex avoid having his/her credit impacted if the spouse with the house defaults? Answer: The scenario: Jane stays in the house, Bob quit claims interests of the property, but chooses to remain on the mortgage and the mortgage is a joint account. Jane stops paying the mortgage. Both Bob and Jane’s credit will be adversely affected by this. Jane will not be able to refinance the mortgage for 12 months from the date of the last late payment. Bob will not be able to purchase a home for 12 months from the date of the last late payment even if the courts determine the liability doesn’t belong. Bob may have gone out and purchased a home under the Fannie Mae guidelines mentioned above and may not have enough cash to spare to keep Jane’s mortgage current if Jane is unable or unwilling to pay the mortgage. If the home ends up in a foreclosure, both Bob ( if Bob has not purchased a home yet) and Jane will be renting a home for four years after the date of the foreclosure or until a “right sized” sub-prime mortgage market comes back to the US. Exception: None to my knowledge at this time. Advisory Note: Determining the best position for the client with regards to mortgage options are best handled early on in the divorce proceedings. I’ve had a case recently where the collective decision to sell the marital house was decided early on due to severe credit issues with one of the spouses. 5. In a situation where one of the spouses wants to buy a new house prior to finalizing the dissolution, lenders used to accept a signed quit claim deed from the other spouse on the new house and did not require that the divorce be final (or that a Property Settlement Agreement be signed) in order to lend to the buying spouse. Is this still the case? Answer: This is still the case. Bob can still go out and buy a house as a “Married, Separate Estate” title holder. He would need to qualify for both marital home house payment and new house payment (unless Jane had refinanced the property). Jane would be required to sign a Quit Claim Deed at closing for the property Bob is purchasing. Exception: None that I’m aware of at this time. Advisory Note: Lenders are concerned about which home is the primary residence. There cannot be two. So in Bob’s case, we would need to make sure that an underwriter knows of the divorce and that he is buying the home on his own. This could raise red flags at underwriting and be additional concerns for approval, but most times this can be worked through provided the numbers are “right sized.” 6. What impact does a debt consolidation plan have on a refinance? (Let's say the consolidation plan runs 5 years and they're just a year or two into it) Answer: If the debt consolidation program is reported on a credit report as Consumer Credit Counseling, the credit damage is as if the event is a bankruptcy. For an FHA loan they would need to have been out of the CCC program for 24 months and have 12 months of clean credit.

For a Fannie Mae loan or conventional loan, the client would need to have four years out of the CCC program prior to be eligible for this type of a loan. Exception: If the client is in a credit remediation program, where they have hired a company to help them clean up their credit, there would be no affect either way on credit qualifying. Advisory Note: Clients considering CCC may want to consider other alternatives due to the long term adverse nature of the program with regards to qualifying for a mortgage. 7. What differences, if any, are there in a refinance in a meretricious relationship as opposed to a marriage? (A client hopes to refinance and remove his girlfriend from the loan and title.) Answer: The basics remain the same as a marriage relationship as a meretricious relationship. The same risks exist to the credit if girlfriend is in the house and boyfriend is out of the house and girlfriend is responsible for paying the mortgage. If she stops paying, both parties credit will be damaged and mortgage program eligibility will suffer. The meretricious relationship will have additional costs of removing the girlfriend from the account. Since they are not married, the State of Washington will want their excise tax at close of escrow for the refinance. The calculation for the excise tax is 1.78% times the underlying mortgage debt divided by two. Exception: Same-sex couples who are registered partners in the State of Washington may be exempt from paying excise tax in this situation. Advisory Note: The removal or addition of a non-married party to a title or loan has a cost. It is a good idea for a client to be aware of these costs early on. 8. How should clients handle getting an appraisal to set value of a house, when they plan to then refinance to pay off the other party's equity? (Can you use the same appraisal for both purposes? Do you need to alert the appraiser to that issue? How are fees for the appraisal handled?) Answer: Prior to additional lending restrictions (within the last 6-12 months) regarding appraisals, lenders would be able to accept any appraisal provided the appraiser was approved with that lender. In this mortgage season most lenders have a specific way of ordering appraisals. They will have a rotating pool of appraisers to whom each loan will be assigned on a rotating basis. Depending on the appraiser and lender the client may be paying for two appraisals. Typically the appraiser will charge $450 for a standard appraisal due at the time of the inspection for a private party or billed to a lender net 30 days. Exception: I’m not aware of too many lenders that don’t have some form of rotational appraisal system. They may exists, but I am unaware of them at this time. Advisory Note: It might be a good idea to have one to three appraisers that you have an ongoing referral relationship. If you have a lender that you like to work closely with, they would be happy to provide you a list. The list of appraisers from your lender could possibly save the client some money. A suggestion is to set client expectations that they will be paying for two appraisals: One for determining value for the courts and one for determining value for the bank. Also, each appraiser is different so they may experience different values for each appraisal.

9. Can I afford to keep the residence? Answer: Possibly. The three main things that will determine the ability to keep the residence are: Credit: See Advisory Note on Question Number 3 regarding credit discovery and remediation Employment (Income): See Question 1 regarding spousal and child support. Debt-to-income ratios are under this category. This is a measure of household debt as compared to income. Typically the maximum ratio for a household will be 45%. This means that no greater than 45% of the client’s gross income (prior to taxes being taken out) would go to service a mortgage payment, car payment(s), student loan(s), and or credit cards. Funds to Close (Equity/Appraised Value): What we are seeing in lending right now are appraised value issues. Meaning the appraisals are coming in lower and the equity required to qualify for a refinance is increasing for cashing out spouses. When the cash out is a requirement of a divorce decree, the equity requirement may be reduced. The decree has to be recorded in order to meet this requirement. Exception: Case by case. Investor by Investor. Advisory Note: Building a loan that is right sized and correctly underwritten is harder in 2008 as compared to 2006 or 2007. As the result of this change, it is highly suggested that the client speak with a loan professional early into the process. 10. How can I buy out the interest of the other spouse? Answer: Using a mortgage tool to cash out the other spouse can and still does work. The basics are the similar to the answers under Question 9. 11. How much can I afford with a new residence and what would my monthly payments be? Answer: See question 9 under employment and Debt to Income Ratios. 45% of the gross monthly income for the household is a maximum. Exception: There are cases that will accept higher debt to income ratios. They are case by case and investor to investor. Advisory Note: I’ve attached Table 1 to this document as a way to calculate payments. The factors are for every $1,000 financed. Example: Loan amount: $400,000 Interest rate of 6.000% $400,000 divided by $1,000 = $400 $400 times factor of 6 = $2,400 per month for principal & interest $400 times factor of 7.692 = $3,076.80 per month for principal, interest, taxes (est.) and insurance (est.)

Table 1

Rate 3.000 3.125 3.250 3.375 3.500 3.625 3.750 3.875 4.000 4.125 4.250 4.375 4.500 4.625 4.750 4.875 5.000 5.125 5.250 5.375 5.500 5.625 5.750 5.875 6.000 6.125 6.250 6.375 6.500 6.625 6.750 6.875 7.000

% % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % %

PI

PITI

4.22 4.28 4.35 4.42 4.49 4.56 4.63 4.70 4.77 4.85 4.92 4.99 5.07 5.14 5.22 5.29 5.37 5.45 5.53 5.60 5.68 5.76 5.84 5.92 6.00 6.08 6.16 6.24 6.33 6.41 6.49 6.57 6.66

5.410 5.487 5.577 5.667 5.756 5.846 5.936 6.026 6.115 6.218 6.308 6.397 6.500 6.590 6.692 6.782 6.885 6.987 7.090 7.179 7.282 7.385 7.487 7.590 7.692 7.795 7.897 8.000 8.115 8.218 8.321 8.423 8.538

Rate 7.125 7.250 7.375 7.500 7.625 7.750 7.875 8.000 8.125 8.250 8.375 8.500 8.625 8.750 8.875 9.000 9.125 9.250 9.375 9.500 9.625 9.750 9.875 10.000 10.125 10.250 10.375 10.500 10.625 10.750 10.875 11.000 11.125

% % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % %

PI

PITI

6.74 6.83 6.91 7.00 7.08 7.17 7.26 7.34 7.43 7.52 7.61 7.69 7.78 7.87 7.96 8.05 8.14 8.23 8.32 8.41 8.50 8.60 8.69 8.78 8.87 8.97 9.06 9.15 9.25 9.34 9.43 9.53 9.62

8.641 8.756 8.859 8.974 9.077 9.192 9.308 9.410 9.526 9.641 9.756 9.859 9.974 10.090 10.205 10.321 10.436 10.551 10.667 10.782 10.897 11.026 11.141 11.256 11.372 11.500 11.615 11.731 11.859 11.974 12.090 12.218 12.333

Jeff McGinnis | MetLife Home Loans | 1100 Olive Way Suite 1001 | Seattle, WA 98101 Phone: 206.625.1500 | Fax: 206.382.0269 | E-mail: [email protected]