The Lender’s Review of the Divorce Decree
I end all of my *Assessment/Approvals (in bold red letters) with…
URGENT and CRITICAL
Please copy me on drafts of the decree before they are executed by the parties. I will pre-underwrite this draft to assure a smooth transaction. Pertinently, divorce decrees are universally underwritten as part of a loan file for any applicant who has been divorced. In any case, the client’s decree will most certainly be underwritten in this instance. ‘Tis better to pre-underwrite than to be caught by surprise.
Fact #1: Most lenders will tell a divorcing (potential) applicant to get their divorce finalized, bring them the decree and they will “see what we can do."
Fact #2: Borrower’s (applicants for mortgage financing) recent divorce decrees will be underwritten. (Recent can be as long as 18 years in the past or longer).
Fact #3: The divorce decree will either Accommodate the loan approval, Restrict it or Prohibit it outright.
How and Why?
Exactly how a decree either Accommodates or Restricts or Prohibits mortgage financing will be explained in a future newsletter. For now, let me get to the solution – we’ll deal with specifics behind those three possibilities later.
There are many reasons why a lender underwrites the decree - to see if it accommodates, restricts or prohibits outright the loan. Here’s why - Simply put, decrees create liability, explain the flow-of-funds and establish continuance of income.
Think about it – even though this scenario is not likely to happen, it can. A couple is divorcing. Each has 10 debts which report (on a credit report) as their own separate debt. In theory, all ten of one party’s debts could be assigned to the other party and vice versa. I’m not a lawyer so I may have missed a legally prohibitive principle that would disallow this. But, by way of illustration, I think you understand what I mean. The point is - the underwriter has no way of knowing what debts to count in the divorced or divorcing applicant’s (all-important) debt ratios without some agreement or order. And joint debts…well, it’s obvious that each debt will show up on both parties’ credit reports. Thus, the underwriter needs to know if their applicant or the other party will be assigned that debt. The lender can exclude a reported debt/liability from their applicant’s debt ratios if it has been assigned to another party in an agreed divorce decree or Rule 11 Agreement (or MSA or any other “legal” [read “enforceable”] document). Without such an assignment of debt, an underwriter has no choice but to count this debt in the applicant’s debt ratios.
Often, these are make-or-break issues. A review of the decree – BEFORE FINAL ENTRY – by a competent Divorce Lending Specialist (certified by The Mortgage Institute) will not only provide a pre-underwriting review of the decree but will measure the impact upon their borrower’s loan approval AND will offer solutions.
There are different solutions to a debt ratio issue. And, I’ll cover those in another newsletter. For now, it’s important to note that those solutions can only be instituted within the decree. So, it’s critical that one of our Divorce-Lending Specialists not only review the decree but provide clear recommendations for a solution or, at the very least, alert the parties/attorneys about any challenges in financing.
Flow Of Funds
Every dollar must be “sourced” and accounted for in mortgage underwriting. One cannot just show up with a check for $50,000 as a down payment for a house purchase without it having been reviewed and approved by the lender. For example, before Dodd-Frank, it was commonly held that large deposits (interpreted as anything over $500) to a borrower’s account must be explained and documented. Since Dodd-Frank…well think of it this way (facetiously put), the government thinks that I am a crook, that your client is a terrorist and that you may be trying to fund terrorism. One of the consequences of this idea is that deposits over $50 (and some smaller than that) must be documented and explained. They’re called “non-payroll deposits” and they always raise a red flag. I’ve had Naturally, when a divorce decree stipulates that on or before such-and-such date, husband will transfer $45,345 to wife, an underwriter only needs to see that the deposit of $45,345 actually came from one of husband’s accounts. The decree overcomes the suspicion of terrorist funding activities. And it gives the underwriter a forthright explanation. They love this.
Continuance of Income
Establishing the Ability To Repay is now a matter of law – not just industry standards. It’s a big thing. Moreover, it’s fairly well established that the lender wants a three year continuance of any qualifying income. That’s nearly impossible to firmly establish (by documentation) in, for example, a typical job. For one thing, the employer is not likely to address “continuance” of income let along guarantee it for three years from date of the loan. Most just leave that box blank when it asks for “probability of continued employment.” What employer would want to go on record as guaranteeing employment? So, lenders rely upon other factors like time on the job or, more critically, time in a particular line of work. They look for two years. I’ve seen occasions when underwriters research a particular career type or professional skill. A nurse, for instance, is more likely to be able to find a good job than, say, someone whose only skill is repairing typewriters. But, this wasn’t always the case.
Very few documentation can be got which specify “continuance of income.” A divorce decree is one of those rare documents that specifies – to the day – how long support income will continue…or at least, be ordered by a court. And, this is enough for lenders. When citing the required documentation for qualifying child or spousal support, the automated findings through Fannie Mae and Freddie Mac will state something like “document receipt of support for 6 consecutive months and verify its continuance for 3 years.”
It’s not uncommon for me to recommend a slight restructuring of support so as to assure the borrower can qualify for their mortgage financing. My standard procedure is to work within the numbers and agreement that are “on the table” and see if a restructuring of that would work for all parties.
There are scores of other factors in a divorce decree that affect loan qualifying. Most lenders tell a potential applicant to get their divorce finalized and only then bring in the decree so the lender can “see what we can do.” This is a travesty and it is totally unnecessary. Moreover, it is the opposite approach we, at The Mortgage Institute, take. By the time the divorce is final, the loan is ready to close….if we have reviewed the decree beforehand.
So, the work flow goes like this:
*An Assessment/Approval is my report to the attorney of a divorcing customer. It outlines a conditional loan approval and specifies elements that should be included in a final divorce decree in order to accommodate the financing needs of the client.
Thanks for reading.
Noel Cookman (972-724-2881); [email protected]