Wisconsin Lawyer: Helping a Client Buy or Keep a Home During a Divorce:

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    Helping a Client Buy or Keep a Home During a Divorce

    The desire to retain or buy a residence need not prevent a married client from obtaining a divorce. Recent changes in the considerations on which mortgage lenders rely have made it easier for single individuals to obtain necessary financing for home purchases.

    Joseph W. Boucher, Danielle Marie Johnson & Aaron Meyer

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    The desire to retain or buy a residence need not prevent a married client from obtaining a divorce. Recent changes in the considerations on which mortgage lenders rely have made it easier for single individuals to obtain necessary financing for home purchases.

    The marital or family residence is often the most highly coveted asset when couples divorce, and the related financial entanglements can be difficult to unwind. When helping clients navigate the complexities of selling or refinancing an existing home or purchasing a new home while undergoing a divorce, it is important to understand the ever-changing real property landscape, each client’s unique circumstances, and his or her available options. By avoiding common misconceptions and building strong partnerships, lawyers can successfully guide clients through this emotional and potentially discouraging divorce-related transaction.

    Changing Landscape

    Changes in lending guidelines have made it easier for divorcing couples to dissolve their real property ties or to purchase their own homes before their divorce is final. For example, previous Fannie Mae1 and Freddie Mac2 rules and guidelines did not consider unearned income such as maintenance or child support and would not disregard debt listed under a client’s name for which he or she was no longer responsible. However, that’s changing.

    Today an individual who is legally separated and has a marital settlement agreement3 on file with the courts may apply for a home mortgage without the other spouse’s signature and without consideration of the other spouse’s income, assets, or liabilities. A client’s unique circumstance will dictate the available options for real property financing, which has become more efficient.

    Information Gathering

    An attorney must understand a client’s situation to be in the best position to help the client understand his or her options when buying, selling, or refinancing a home during a divorce. The following questions are just a few that can help develop this understanding.

    • Will the client be retaining the marital home?

    • Will the client need to include child support or maintenance as income to obtain a home-purchase loan?

    • Is there a lot of marital debt to be divided in the divorce?

    If a client hopes to retain the marital home, an appraisal may be needed to determine if an equity payout to the spouse will be necessary. It is crucial for the lawyer to advise the client to consult with a credible lender before an appraisal is ordered to ensure required compliance with the Dodd-Frank Act4 and to avoid paying for multiple appraisals. An experienced lender will be a powerful resource during review of pre- and post- divorce credit report information, sources of income, and debts to be included in the loan approval process.

    Required Elements

    Although options available to clients will be shaped in part by the information gathered above, there are some requirements for financing that must be met in all cases. The following items, among others, must be filed with the court through a marital settlement agreement or final divorce decree:

    • Division of liabilities,

    • Division of assets, and

    • Establishment of child support or spousal support of any kind, if necessary.

    This required information will be crucial in identifying the financing options available to a client. It will provide a clear picture of the debt in relation to the assets and income following the dissolution of the marriage.

    Viable Options and Requirements

    Income Item Considerations8

    Existing support continuance

    To be considered, support must continue for at least three years following the date of the loan; documentation, such as bank statements, tax returns, or court records, will be required as proof that payments have been full and regular.

    Income considerations

    Income must be verified for at least the most recent full two years by a third-party record and must be reasonably expected to continue. Social Security Disability Income is considered ongoing, while Supplemental Security Income is not.

    Maintenance, alimony, and child support

    To be considered income, maintenance, alimony, or child support payments require a divorce decree or court-ordered separation agreement. Income must continue for a minimum of the next three years. If it is the primary source of income and there is a defined expiration date (even beyond three years), then the income may not be acceptable for borrowing qualifying purposes.

    Exceptions:

    • Conventional, FHA, USDA loan programs currently require 6 months’ receipt and 36 months’ continuation from loan closing date.

    • VA loan programs currently require 3 months’ receipt and 36 months’ continuation from loan closing date.

    Nontaxable income

    Special consideration can be given to regular sources of income that may be nontaxable. These may be grossed up, but tax returns are required to confirm amounts. Income must be documented to continue for a minimum of three years from note date.

    Self-employment income9

    Tax-reported business income does not necessarily represent the income the borrower receives. A self-employment income cash-flow analysis is needed to determine which income can be relied on for payment obligations.

    Reentering the workplace

    For individuals reentering the workforce, six months’ current employment history is required, although some exceptions are made at three months.

    Multiple employment positions

    Full time is counted while part time may be used based on a two-year history of working in the same position or same industry.

    Lump-sum payments

    Lump-sum payments are not considered income.

    Voluntary, consistent payments before marital settlement agreement is entered into

    Voluntary consistent payments may be used toward minimum timeframe required by lenders. Payments must be documented and consistent without restrictions on check memo lines and later affirmed by the marital settlement agreement.

    Debt and Liability Calculations10

    Total monthly debt includes but is not limited to:

    • Estimated housing expense

    • Installment debt with more than 10 monthly payments remaining

    • Installment debt with fewer than 10 monthly payments remaining as required by qualified mortgage rules

    • All revolving or open-end debt accounts

    • Balloon payment notes due within 12 months after note date

    • Lease payments regardless of time frame

    • Payment on financial assets only if account liquidation would not cover loan amount

    • Child support or maintenance

    • Net rental loss

    • Any other contingent liabilities that the borrower is obligated to pay

    Contingent liabilities11

    • Contingent liabilities may be disregarded if the borrower provides conclusive evidence from the creditor that there is no possibility the creditor will pursue debt collection against the borrower should the other party default.

    • When borrower remains obligated on an assumed mortgage (FHA, VA, USDA) that has been sold or transferred more than 12 months before, the debt does not need to be considered a contingent liability.

    • If the lender obtains canceled checks for at least the most recent 12 months showing that the primary obligator has been making timely payments during that time from their sole account, then the contingent liability need not be counted.

    Common Misconceptions

    A client experiencing the heightened stress typically accompanying a divorce may find the complex process of obtaining financing especially confusing. To assist your client as he or she navigates this unfamiliar terrain, it is important to be aware of the following common misconceptions.

    Joseph Bouchercom jboucher neiderboucher Joseph W. Boucher, U.W. 1978, CPA, MBA, is a founding shareholder of Neider & Boucher S.C., Madison. His practice emphasizes business legal and tax planning for closely held businesses.

    Danielle M. Johnsoncom djohnson neiderboucher Danielle M. Johnson, St. Thomas 2013, is with Neider & Boucher, Madison, focusing in the areas of business transactional, mergers and acquisitions, and real estate.

    Aaron Meyercom ameyer settlerswi Aaron Meyer holds an MA from Yale University and is a mortgage loan originator at Settlers Bank, Windsor, where he also serves as mortgage sales officer. He has more than a decade of industry experience, a firm grasp on ever-changing regulatory requirements, and an in-depth understanding of financial markets. He serves borrowers and realtors alike.

    Misconception: All mortgage loan proceeds must always go toward the purchase of the home.

    Fact: Unlike a standard home purchase in which all loan proceeds must go toward paying the seller of the home, in a divorce in which the spouse retaining the marital home is required to refinance it to remove the other spouse’s name, the bank will allow proceeds to go in cash to the removed spouse in exchange for his or her equity in the home.

    Misconception: A client should not request a credit report when going through a divorce.

    Fact: Pulling a credit report early in the process will provide a client with his or her baseline credit, accurate scores, and debt information before events occur that could negatively affect his or her credit. This information will be extremely helpful to a lender when assisting the client.

    Misconception: A client cannot apply for credit until the divorce is final.

    Fact: Although some banks may discourage this, clients are entitled to apply for credit without the other spouse’s signature and cannot be required to apply for joint credit.

    Misconception: A client is always responsible if the other spouse defaults on debt.

    Fact: Contingent liability can be disregarded if evidence is provided that the creditor will not pursue debt collection should the first party default on the obligation.5

    Successful Outcomes

    In sum, buying or refinancing an existing home or purchasing a new home during a divorce is complex. However, lawyers’ dedication to understanding clients’ unique circumstances will alleviate much of the related stress. Partnering with a strong lender will provide an inside track to identifying viable options, and understanding the requirements and misconceptions shared here will allow lawyers to expertly support clients in the pursuit of their goals. See the sidebar for some success stories in which lawyers and lenders worked together to help obtain the best possible outcome for the client-customer.

    True-life Examples

    These stories are based on the client files of Aaron Meyer, a mortgage loan officer in the Madison area.

    • Youssef had both collateral and credit issues related to medical collections and multiple 30-day late payments. He needed to obtain a mortgage on the marital home that he is retaining so that he could pay Farah, his ex-spouse, the $50,000 in equity ordered by the courts. He received a shorter-term mortgage loan from his banker with a balloon payment due in three years to accomplish marital settlement agreement requirements. The banker and the lawyer worked with the client on credit repair and collateral issues and were able to convert the shorter-term mortgage loan to a fixed-rate conventional 30-year mortgage within 24 months. Addressing credit issues resulted in better interest rates, terms, and payments for the client because the Exhibit 196 calculator uses FICO scores to determine interest rates.

    • Maria had been divorced for two years. The divorce decree stated that her ex-husband, Luis, would keep the marital home and had to refinance to remove Maria’s name within the first 12 months. Luis did not do that. Maria wanted to purchase a new home, but the mortgage on Luis’s home was still listed as joint and was reflected on Maria’s credit report. Because the divorce decree removed the mortgage on the marital home as an obligation for Maria, and Luis provided checks from his solely owned account proving he had made mortgage payments for a minimum of 12 months, the lender was able to disregard the mortgage debt and payment during the loan approval process.

    • Sandy had been divorced for three years. She was advised to sign a quitclaim deed removing her ownership interest right after the divorce and even before George, her ex-spouse, refinanced the home solely into his name. George did not refinance the home, and Sandy’s name remained on the mortgage. George lost the home to foreclosure 24 months later. Sandy had a foreclosure reporting on her credit report. The lender was able to document that Sandy gave up her ownership in the home before the home was foreclosed on, and that George was required to refinance the home pursuant to the settlement agreement. The lender was able to secure an exception for conventional financing with Fannie Mae in under the seven-year waiting period of a foreclosure.7

    • Sofia was in the process of a divorce and wanted to purchase a home. The lender advised Sofia that to use the income from maintenance to qualify for a purchase money mortgage, she would need to have it documented in a marital settlement agreement and receive it for a specific amount of time. This information allowed Sofia to quickly purchase a home and aided her attorney with the information needed for conventional financing.

    Meet Our Contributors

    What is your greatest professional accomplishment to date?

    Danielle M. JohnsonI recently was selected as a 2019 Wisconsin Up & Coming Lawyer by Wisconsin Law Journal. While it is a great honor to be among such talented attorneys, my greatest professional achievement will always be a satisfied, grateful client. I consider being able to affect someone’s life for the better the best part of my job.

    Having a career that allows me to work with innovative entrepreneurs is so rewarding. Receiving a phone call or email from a client sharing their amazing accomplishment and learning that my advice and support was invaluable to them keeps me striving to do my best.

    com djohnson neiderboucher Danielle M. Johnson, Neider & Boucher S.C., Madison.

    What’s the best career advice you ever received?

    Joseph BoucherWhen I was a young lawyer, three different lawyers provided meaningful advice that greatly influenced my career.

    One lawyer told me that we have to continuously enhance our legal skills. Another lawyer said that, while at that time, I may know more than he did, clients inherently respect experienced attorneys. And a senior lawyer emphasized patience, because time can benefit your career if you work at it.

    My takeaways were that with patience and hard work one could become a valued legal advisor for clients.

    com jboucher neiderboucher Joseph W. Boucher, Neider & Boucher S.C., Madison.

    How do you recharge your batteries?

    Aaron MeyerI play baseball on Friday nights in a 35-plus-year-old league. Being the “old man” on the team, I have to work out all year. But, there is nothing better than playing under the lights every Friday night.

    On another note, the best career advice I ever received was this: you will be the same person you are today in the future except for the books you read and the people you meet.

    com ameyer settlerswi Aaron Meyer, Settlers Bank, Windsor.

    Become a contributor! Are you working on an interesting case? Have a practice tip to share? There are several ways to contribute to Wisconsin Lawyer. To discuss a topic idea, contact Managing Editor Karlé Lester at (800) 444-9404, ext. 6127, or email org klester wisbar wisbar klester org. Check out our writing and submission guidelines.

    Endnotes

    1 For information on Fannie Mae online single-family originating and underwriting, see www.fanniemae.com/singlefamily/index (last visited Sept. 18, 2019). Fannie Mae – Quick Reference – underwriting guidelines, eligibility requirements, FNMA Standards, quarterly update Oct/Nov/Dec 2018.

    2 Freddie Mac, Freddie Mac Selling and Servicing Requirements, (last visited Sept. 18, 2019).

    3 Wisconsin Circuit Court forms for marital settlement agreements are available here; and here.

    4 The text of the Dodd-Frank Act is available here.

    5 Fannie Mae, Selling Guide, B3-6-05: Monthly Debt Obligations (12/04/2018).

    6 Freddie Mac, Exhibit 19 Calculator, (last visited Sept. 18, 2019).

    7 Fannie Mae, Selling Guide, B3-5.3-07: Significant Derogatory Credit Events – Waiting Periods and Re-establishing Credit (08/07/2019).

    8 Fannie Mae, Selling Guide, B3-3.1-01: General Income Information (08/07/2019).

    9 Fannie Mae, Selling Guide, B3-3.2-01: Underwriting Factors and Documentation for Self-Employed Borrower (12/04/2018); Freddie Mac, AIM for Self Employed (April 2019); FHA: HUD 4155.1, chapter 4, section D-4; VA: VA Pamphlet 26-7, revised, Credit Underwriting /2:Income pg. 4-14j self-employment income.

    10 Fannie Mae, Selling Guide, B3-6-05: Monthly Debt Obligations (12/04/18).

    11 Fannie Mae – Quick Reference – underwriting guidelines, eligibility requirements, FNMA Standards, quarterly update Oct/Nov/Dec 2018 – Liabilities/Credit/Risk Assessment; 404: monthly debt obligations – debts paid by others (pg. 80), www.fanniemae.com/content/guide/selling/b3/6/05.html; Fannie Mae, Selling Guide, B3-3.1-01: General Income Information (08/07/2019); Fannie Mae, Selling Guide, B3-3.2-01: Underwriting Factors and Documentation for a Self-Employed Borrower (12/04/2018); Fannie Mae, Selling Guide, B3-3.1-09: Other Sources of Income (08/07/2019); Fannie Mae, Selling Guide Announcement SEL-2017-04 (April 25, 2017).




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