August 25, 2009 by wendy.

A lot has changed in a year’s time.  The old rules for financing and refinancing a house are very different than they were during the real estate boom.  So when couples are figuring on how to split assets, they will need to ensure that the spouse who takes the house can actually obtain a mortgage.

The downturn in the real estate market is one big reason.   Homes are often worth less than the price that they were originally purchased, leaving the buyers “underwater” or owing additional funds upon the sale of their house or any refinance.  Appraisals, too, have changed.   Most mortgage lenders do not get to choose their appraisers any longer – but must have an “arms length” relationship.  Appraisers often need two comparables in the neighborhood, two listings under contract, and will include any neighborhood foreclosures in the price.  Furthermore, appraisals are only good for a certain length of time before they must be redone to make sure the price is still accurate.  Lenders really don’t care how nice your house is – only that the value is accurate.

The mortgage scene is also much different.  For one thing, lenders are taking a much closer look at an applicant’s finances.  People with assets but no income need not apply.  So this may eliminate spouses who have received a settlement of cash or other assets, but who have no income, or who are just getting back into the work force.   Lenders also want to see a history of the applicant receiving child or spousal support – some for 3 months, others for 6 months (if the applicant is using support as income for the loan).  And some lenders want to see at least 3 years of child support written in the settlement agreement.  Most lenders will not want to issue a mortgage for a house payment of more than about 28% of the applicant’s income.  They do not want the mortgage to be more than 36% of gross monthly income.  Additionally, credit scores must be good, and most lenders will want a credit score of 720.  Lenders are asking for 10% down for a conventional property, 20% for a vacation property, and 25% for investment property.  VA and FHA loans have different requirements, but some of those can be fairly tough.  Lenders are often treating the “deed in lieu of foreclosure” and short sells as regular foreclosures.  Thus, people having gone through such home “give-backs” may find themselves unable to refinance or receive a mortgage until more time has passed.

Be aware that it is also taking longer to close loans.  The paperwork and disclosures have become more onerous, and so a closing generally cannot be done in less than 30 days.  Many lenders laid off a number of employees last year, so your refinance or mortgage may move more slowly than expected.

What does this mean to divorcing couples?  Some may not be able to refinance their homes because of a low house appraisal.  Others may not be able to refinance at all on their credit, salary, work history, or for other reasons

If a divorcing couple cannot sell the house and cannot refinance the house in one person’s name, there are few options.  Live apart and wait until the housing market comes back?  Have the spouse receiving the homework on their credit and income?  Before any paperwork is signed, it would be advisable for one or both parties to consult a mortgage broker to determine each person’s ability to obtain a mortgage or refinance.  Moreover, they would be advised to consider the worst case scenarios of their proposed settlement and plan for these should they occur.

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August 17, 2009 by wendy.

There is an old joke that family law attorneys tell about divorce that goes like this:  “ Why is divorce so expensive?  The answer is – because it is worth it.”   Although this is dark humor about a very serious subject, I don’t think that divorce needs to be as expensive as it sometimes is, especially if couples do not allow their emotions to get out of control, and are able to work together, rather than to go to court.

With the economic situation as it is, many couples are forced to spend as little money as possible on divorce, often opting to forego legal and financial advice.  While limiting the cost of the divorce is important to most people, doing things correctly is also critical, and most couples are unfamiliar with the legal and financial nuances of divorce.  Most divorced people heal from their divorces and are able to go on with their lives within about a year.  At that point, they then may realize that they have a really crummy settlement agreement, at which point it is too late to make any changes.

Divorcing couples generally have one chance to get things right during a divorce.  According to Fadi Baradihi, CEO of the Institute for Divorce Financial Analysis, speaking at the IDFA National Conference in Chicago, on July 2009, “Do-it-yourself divorce is very likely to create time-bombs for couples who do not understand the legal and financial implications of the agreement they have created and signed using a kit or online service.  This is where a financial professional trained in the special issues of divorce can really help.”

For example, settlement agreements may need to contain a number of clauses to protect each party as the economic situation changes.  What if the house can’t sell?  What if one party wants to get their portion of the equity from the house and the new appraisal indicates that there is less equity than estimated, or worse - a negative equity?  What do they do with the stock options that are underwater?   What if the spouse getting the marital home cannot qualify for the mortgage payments?  How long must they receive maintenance or child support payments to qualify for the mortgage?  Which assets should they select to receive as their portion?  If one spouse is considering bankruptcy, would cash or the IRA be a better asset?  What happens to child and spousal support if the payer spouse dies before the payments end?

I have actually had to adjust agreements as the stock market was falling to include clauses that indicated how “investment experience” on various accounts was to be treated.  In another instance, I was discussing with an unemployed client the possibility of refinancing her house, and the mortgage refinancing rules were changing as the divorce was occurring.  By the end of the divorce, the rules had changed so that she was unable to refinance – she received a lot of assets as a result of the settlement, but had no income.

The Honorable Judge Kathleen McCarthy, in Wayne County, Michigan, sees a lot of pro-se, or do-it-yourself divorces.  She says that so many of them are poorly done and fraught with legal and financial problems.  Her words of wisdom are, “Most people would benefit from spending a least a couple of hours consulting an attorney and/or a divorce financial professional to avoid future problems.”

I understand that most couples going through divorce just want the pain to end and the hassles of divorce to be over.  I have had couples tell me “I don’t care what happens – let’s just get it done and the sooner the better.”  I have had to remind them that this is an agreement that they will be living with for years – so having a little extra time to think things through and to make sure it is right for them is so important.

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