Challenges in Relieving a Spouse of Debt...the most common question

Today’s question comes from the awesome Lori Dally ([email protected]) of the great Seltzer & Dally

Question:

Hey Noel:

Hope you are doing well! I had a quick question I was hoping you could answer for me. I have a client who's wife's name is solely on the mortgage. He is wanting to keep the house, but his wife obviously wants him to refinance into his sole name. They are self employed and are behind on filing taxes (haven't since 2013) - so that is an issue to him getting a loan.

He claimed he talked to the bank and they can "add" him to the loan - that doesn't seem correct does it? My thinking is the only way to remove her from liability is to sell the house or refinance it. Do you have any creative solutions?

Sincerely,

Lori E. Dally

Answer:

Lori,

Great to hear from you.

Your instincts are right. “adding him to the loan” doesn’t really accomplish what you want – totally removing wife from liability.

Our “creative solution” would start with getting them to file taxes, calculating the debt (if any) to the IRS and, then, calculating the monthly payment they work out with the IRS as it must, then, count as a monthly debt service in his debt ratios. If the divorce settlement splits that in any way, it would obviously help them both in financing, Without the divorce settlement assigning debt service as a percentage or dollar amount to each party, the entire payment would count against each of them…sort of double-counting.

Selling might be the quickest solution. Maybe they will make enough in the transaction to either pay or settle payment to the IRS??

We’ll be happy to walk with them through this so that they can be better positioned to purchase a house…as early as possible.

Sorry…no magic bullets.

Noel Cookman
America’s Premier Divorce-Lending Specialist
office 972-724-2881 † mobile 817-454-4555 † fax 866-295-0567
www.TheMortgageInstitute.com
601 W. NW Highway † Suite 200 † Grapevine, TX 76051

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Follow up Question:

Noel:

Awesome - thanks for the quick reply. Is it even possible to just add him to the loan?

Sincerely,

Lori E. Dally

Answer:

Lori:

No. But, that wouldn't solve the problem anyway. The mortgage company might give her a release of liability form but only after he qualified on his own. If he could qualify on his own, he could refi the debt and wife would have the lien/loan paid off not just a piece of paper saying that she might be released from the liability.

Noel Cookman

My Follow Up Thoughts:

No “magic bullets” but a few ideas.

1. Husband still needs to make application sooner than later…and definitely before final divorce. Here’s why:

2. You (and any attorney) would need a realistic time line expectation of how long it will take before he can actually close a refinance transaction and, therefore, get wife removed from liability. There are many elements that go into a loan approval; and, no one is well-advised to do their own qualifying. Moreover, most lenders will not even begin this process until the divorce is final. Then, it’s too late for you to include deadlines and remedies in the decree.

3. We get a client started on his/her mortgage application so that we can deliver to you – the attorney – an assessment with a realistic projection of a closing date. I see it as my responsibility to provide you with the information you need to include workable time-lines in the decree. What good does it do to require financing within 6 months if it will actually take 9 months or longer for the home owner to qualify? You might as well know in advance rather than throw things “to the wind.”

4. If we are working with both clients (one for refinancing the existing mortgage and the other for buying a new home), then we can advise on many things including that thorny issue of the debt to the IRS being factored into their debt ratio (don’t forget about that all-important debt ratio and the famous “ATR – Ability To Repay”).

5. Even though wife will certainly want to know that the existing mortgage liability will not hang out there forever (well, 30 years seems like forever), all is not lost. If the decree properly assigns the mortgage debt to husband, then wife can qualify for her own mortgage financing while EXCLUDING that mortgage debt from her qualifying ratios…even though it still appears on her credit report. Again, not all lenders know this or allow for it. We do. It’s really a standard underwriting guideline that lenders have the option of employing in their customers’ loans.

Here's Lori Dally's and Sarah Seltzer's awesome firm:
Seltzer & Dally, PLLC.
3617 Hulen Street
Fort Worth, Texas 76107
Tel: 817.887.9206
Fax: 817.977.9256
[email protected]
www.yourtexasfamilylawyer.com