Q&A #2B: Does Equity Financing Diminish a DEMANDING Ex’s Portion of Equity?

Refer to the blog immediately before this one. Here it is:

Q&A #2A: Does Equity Financing Diminish a Ex's Portion of the So-Called Equity

Now, pick up the email conversation.

Question

Hi Noel

Thank you for answering! We live in Indiana. The lender says that the extra 20% stays in the home as you described.

The ex is very adamant that he wants "his cut" of it, but as you describe it, it is essentially "unavailable" for that purpose?

You asked me if he wants to finance it. It would be about 41k. What would him financing that look like? How could it be done?

Thank you again!
RB

Answer

There are a couple of options.

But, I must tell you that, at this point, it is sometimes smart to turn the tables and say "I've decided that you can have the house and you can buy me out at the terms you are demanding." Many times, they change their tune. Of course, it's rarely wise to bluff unless you're prepared to follow through. But, neither is it wise to be the desperate party in a negotiation or the one who "wants it" more than the other side.

By your spouse financing it, I mean that you would owe him. But, not by a lien on the house payable to him. I mean a straight contractual installment loan that you pay to him over time NOT secured by a lien on the house.

Also, make sure that you are calculating the equity in the proper manner; by counting the costs of the refinancing in the calculation of what equity remains. You don't just subtract the mortgages from the value. The attorneys should understand this.

Speaking of which, how do you know what the value is? Are you relying on an appraisal ORDERED BY THE LENDER which is doing the loan...because that's the only one that counts.

Thanks, Noel Cookman

Postscript:
It is significant that RB does NOT live in Texas. You see, Texas has home equity *laws which place legal limitations on the loan amount that can be placed as a lien on a homestead property - once equity (cash) has been "taken out" of the property such as in a refinance transaction. The most famous provision of Texas Home Equity laws is the 80% limitation. By law, that LTV (Loan To Value) ratio that can encumber a homestead property in a "cash out" transaction is 80%. When Texas's law passed (in the late 1990's) Fannie Mae and other lending underwriting "engines" like (HUD for FHA, etc.) allowed cash out financing up to and exceeding 90%. In other words, home owners in the other 49 states were allowed to access more of their home's value in a cash out transaction than home owners in Texas could. Moreover, the guidelines in those other 49 states were not limited by law but by - more or less - industry standard.

Well, that's all changed. Notice how RB said “The lender says that the extra 20% stays in the home as you described.” Now, the other 49 states have limitations on cash out (re)financing which just so happen to mirror more precisely Texas’s 80% LTV limitation. It’s just not by law. Rather, it’s Fannie Mae, et al, underwriting standards. So, this is the 80/20 rule that RB references from her lender in Indiana. In Texas, it’s law. In Indiana, it’s simple underwriting standards.

Another issue is his “cut.” Here’s something that would change (for the better) divorce negotiations – Talk less about equity and talk more about accessible equity. That’s the only “equity” that matters anyway. Parties in a divorce may demand all the want from a home’s equity. First of all, there is no legal or standard way to calculate equity. You may think there is. And, you may get parties and opposing attorney to agree on your calculation of equity. But, I challenge you to produce a legal definition of equity whereby all that is needed in order to calculate that equity is the definition.

If a couple owns a house worth $100,000 and they cash out with a loan for $80,000 (the legal limit by LTV ratio), you may have a legal or even an agreed definition of equity – BUT YOU HAVE NO ACCESSIBLE EQUITY IN THAT PROPERTY. By the same token, if the couple owes $80,000 on their $100,000 homestead property and has NOT cashed out, then, depending on several factors, there might be some accessible equity in the property.

*Don’t EVEN get me started on laws that regulate and limit mortgage financing and the underlying basis for underwriting standards. Neither George Bush nor Barack Obama called to ask my advice, though I was happily giving it freely. God bless them both. And our current president, Donald J. Trump has never needed my advice. He managed to get rich and become president of the United States without so much as inquiring one time for my sage wisdom. Go figure. But, my opinions on the matter range from ideas about state laws all the way to federal and regulatory issues and to the Federal Reserve. Hint: I’m not a fan of tax-payers being on the hook for failed “affordable housing” schemes which are later denied by the very ones who perpetrated them.

You can send your questions to [email protected]

Thanks for reading.