Transcript

John Snell: These are the two most important parts of a stay at home parent being able to qualify. You got to have the income necessary, but you also have to have really good credit.

Voiceover: You’re listening to the Texas Family Law Insiders podcast, your source for the latest news and trends in family law in the state of Texas. Now, here’s your host attorney Holly Draper.

Holly Draper: Today we’re excited to welcome John Snell to the Texas Family Law Insiders podcast. John is a certified divorce lending professional who specializes in helping divorcing homeowners make better informed decisions regarding their real property, mortgage and home equity options. John holds an MBA from the University of Michigan with a real estate and finance concentration.

He’s a past president of the Dallas Fort Worth Association of Mortgage Brokers and has written and taught several CLE courses on divorce and mortgage issues. In his spare time, John enjoys classic rock concerts and all things college football. Thank you so much for joining us today.

John: Thank you, Holly. It’s great to be here with you.

Holly: So why don’t you start by telling us a little bit about yourself.

John: Well, I grew up in Michigan, and went to school at University of Michigan. And when I finished I decided I wanted to move to Texas. And I’ve been here ever since. 1985 is when I landed, and I am married, about to celebrate, I believe our 36th wedding anniversary in the summer. And I have two children.

My daughter, Hannah is a civil engineer and went to Texas A&M University. And my son Parker is a graduate of Oklahoma University and is finishing up his master’s degree in music performance at Boise State in Idaho. My daughter is expecting our first grandchild. So that’s pretty exciting for us, right.

Holly: Oh, congratulations!

John: Yeah. And so from a professional standpoint, this month, marks my 30th anniversary in the mortgage lending profession. And I never really expected to end up in this profession. My training was more in commercial real estate and finance. And through a series of circumstances I ended up doing residential financing. And ever since March of 1993. I fell upon this divorce lending niche, really about the early 2000s.

I had been approached by a family law attorney in Collin County, who had a concept called civilized divorce. And I don’t know if you remember, Hal Davis, was his name. But he approached me, the way our mortgage licensing was structured at the time, was that the way the Texas law was put in place, it exempted attorneys from having to qualify for the original mortgage licensing requirements. So came to me and he said I do a refinance on every one of my divorces.

I want to create a one stop shop where I do the attorney work plus I do the refinance to facilitate the buyout. And I need somebody to sponsor me. So I gladly agreed to take him in and, and we worked together for several years. He tragically passed away from a motorcycle accident, probably 10 years ago. But that’s really how I got interested in what he did, what you guys do, and really kind of made it a pillar of my mortgage practice ever since about 2010.

And so from that time forward, I’ve restructured my mortgage practice to be about 75% divorce related. The rest is past customers and real estate agents. But my passion is helping people that are going through divorce and that’s what I live. I eat, sleep and drink it. And you know, it may sound crazy, but that’s what I think about.

Holly: So I’m assuming that law that you mentioned that allowed attorneys to do this lending piece without licensing. I assume that’s changed.

John: Yes, that changed after 2008 when the national licensing went into place, and it replaced the Texas state licensing. So that was also a factor in working with an attorney like Hal also because no longer, the requirements to get licensed at that point became a lot more rigorous. And I think if anybody’s trying to do both, they ended up bailing out on the mortgage part of it. And sticking to the family law part.

Holly: So what exactly is a divorce lending professional and what makes working with someone like that different than working with just your standard run of the mill lending person?

John: Sure. Well, I looked at some statistics last week, and there are about 500,000 mortgage professionals, now, either licensed or registered. And if you work for a bank, you don’t have to be licensed, you just have to be registered. And right now, there are about 800 mortgage professionals that possess the certified divorce lending professional designation. We’re scattered throughout all 50 states.

And what makes us different is our background, training, knowledge and strategic mindset. And we have had to go through education to get the designation and also we go through annual recertification. So I can tell you, there’s probably, there are dozens of very specific guidelines with Fannie Mae and Freddie Mac that pertain to divorce situations. And most of my competitors that are not trained, may not even know they exist.

And certainly they may not be able to implement and navigate through the underwriters and their interpretations of the guidelines. Which I run into a lot where underwriters have a little bit different take on things and then part of what we try and do is educate them that just because that’s the way you’ve always done things, it doesn’t mean that that’s the way it is.

Holly: So today, we’re gonna talk about a little subset of what you do. You and I had gone to lunch a while ago, and the topic of stay at home moms came up. And it turned out that there were a lot of options out there that I wasn’t even aware of, having done this for quite a while.

So I thought it would be really helpful to do a podcast on the topic and help other family lawyers understand what options are out there for the stay at home parent, and you know what the challenges and opportunities are in dealing with that specific subset of client.

So, one of the things, I know this is something that I always do both with divorcing clients and with, you know, even my 15 year old daughter, when I’m advising her about her future, you know, is telling stay at home parents that they should start looking for a job immediately. What would your advice be in that regard, for a stay at home parent?

John: I would totally agree with that, Holly. For most stay at home parents, the transitioning now to being on their own again, their employment income is going to be the major component of what they would need in order to qualify to buy that next house. And so we’ll talk about some other forms of income.

But to me the employment income is a base, and the importance of seeking employment early, especially when you know, the divorce is coming is that from a qualifying standpoint, the stay at home parent needs to be back in the workforce for six months before they’re eligible to get mortgage financing.

Holly: So that’s the target then, six months. So if we have a stay at home parent who starts their new job on Monday, we really need to be looking at a timeline of not finalizing this divorce for at least six months. Would you agree? If their goal is to either qualify for a mortgage or refinance?

John: Yeah, I wouldn’t say finalizing the divorce, but at least build in that flow time before requiring them to either refinance the house or for them to be eligible to get financing. There’s a second part to that. And that in addition to six months back in the workforce, we have to be able to verify two years of previous income, previous employment, which can predate the stay at home part of their history.

So sometimes I’ve gone back 10 years to find employers that a spouse used to work for and get that verification done. And that’s the second component of it. So six years back in the workforce and a two year history proceeding when they became stay at home.

Holly: Six months back in the workforce, right? So what are mortgage underwriters looking for when we’re talking about a stay at home parent? Either trying to get a new mortgage or trying to refinance the house into their own name?

John: So I just kind of mentioned a little bit about the employment income, six months back in the workforce, two year history. In addition, you’ve got child support that you might be receiving. And the rules on child support is that you must receive it for at least six months. And it must continue for 36 months after the mortgage is taken out.

So we call that the 6/36 rule. So that’s another component. FHA loans will allow you to qualify with only three months of receipt. But six months is kind of the norm. I try and avoid FHA loans for several reasons. I don’t know if we need to get into them here. But conventional loans are typically more advantageous to the borrower. Go ahead.

Holly: Oh, I was just gonna say. So how formal do the child support and spousal support payments need to be for that six months? Does it have to be going through the state disbursement unit? Could it be a personal check written from dad to mom saying child support in the memo line or spousal maintenance in the memo line? What exactly counts?

John: Let me just add that spousal support, the requirements are the same as for child support, in that the receipt must be for six months. And then the continuation must also be for 36 months. One thing about setting up the payments for spousal and child support prior to the divorce being finalized, they really have to be pretty formal.

You can’t just write a check from or transfer money from your joint account here to the joint account there, you can’t pay your mortgage, the mortgage payment for your spouse, in lieu of paying them a formal child support payment. It doesn’t have to go through the Attorney General’s office or anything like that.

But what you would want to do is set up temporary orders, that would designate the amount of the temporary child support or spousal support. And that temporary support can’t be less than book file order is, okay.

Holly: Okay, so if the temporary order, child support or spousal support amount is less than the final order, and then you’re trying to qualify based on the amount of the final order, then the six months would restart?

John: The way that the temporary spousal support or child support would work is that it has to be kind of a formal process. I recommend having temporary orders put in place. And the money then must flow from an individual account of one spouse to an individual account from the other spouse. If they do it that way, then we can start the six month waiting period before the divorce is final.

Now, as far as the amount goes, if the amount that the final order is setup is higher than the temporary orders, then you have to start over with a six month waiting period. So you’d always want to try and set up your temporary amount to be what you think the final amount is going to be.

Holly: So I know you mentioned doing formal, temporary orders. A lot of times attorneys will do a what we call rule 11 agreement where everybody agrees to child support is going to be X, child support’s going to be Y, this is going to be the schedule, etc. Everybody signs it, it gets filed with the court. If that type of an agreement is filed with the court, and then you have proof that the parties have followed it, would that suffice?

John: Yeah, that would be fine, too. A rule 11 agreement is perfect, as long as it’s filed with the court, that’s what the underwriters are gonna look for.

Holly: Okay. So then we’re talking about spousal maintenance, it sounds like it’s very important to factor in that 36 month period, because I know a lot of people who are going to be on the hook for spousal maintenance want to get it over with as quickly as possible. But if you want it to count, it’s going to have to be for that length of time, even if it’s for a lesser amount.

John: And I usually recommend setting it up to be a little bit longer than 36 months, just because you don’t know what’s going to happen out there, how long it’s going to take for your client to find a new house, that kind of thing. So I typically will put a little bit of float in there or recommend that for say 40 months, something like that. So you kind of build that in and you’re right. Most spouses want to get that over with as soon as possible.

But for example, rather than setting up payments for 24 months, at a certain level, maybe you stretch it out to 40 months and lower that amount, so that the spouse still can take advantage of counting that is income. And that’s something that you guys would negotiate for in your settlement, if it makes a difference,

Holly: Because it’s easier to negotiate that then transport which we’re really going to end when the child has graduated from high school, absent extraordinary circumstances. Okay, so the next category of income that can count is property settlement note income. Tell us a little bit about that.

John: So property and settlement notes I rarely see used, but you might see that in a situation where one spouse owns a business, and rather than trying to divide up the business with their ex, they come up with a valuation, and then whatever that valuation is, they will pay their spouse a payout over a certain period of time for their interest in that business.

The way the underwriting rules work on property settlement notes, is that you have to receive the payment for 12 months, as opposed to six months. And then it also needs to continue for 36 months after that. So that’s a little bit of a longer period of time, and I rarely get to see any property settlement notes that we use for mortgage qualifying.

Holly: And it’s important to keep that different timeline in mind if somebody is trying to mix these pieces of the puzzle to get to that 12 month mark before your qualifying. How about asset based income? What is that and what can that do for our clients?

John: So as far as asset based income goes, there’s a few different items in there that could potentially qualify as income. The first is interest and dividend income that would show up on your tax returns. We look at two years of tax returns to evaluate and average what that income would be.

The difficulty sometimes in using that is when you’re dividing up assets, and unless you can really identify this particular account goes to this spouse and this account goes to that spouse and you can track it on the tax return, you have a little bit of a hard time proving to the underwriter, how much of that income really was off of the investments and dividend.

A second type of income that can be derived from assets is that we call it an asset based lending program, where we would take the amount of assets that you receive from your divorce settlement, and then divide that by the number of months in your mortgage. Typically, people are borrowing for 360 months. And even though you don’t draw that any income from that, because those assets are there, we can count that as income.

There’s a factor that the underwriters apply to it, they take 30% off of the asset amount. And because the market could fluctuate and so forth, and so your value of your assets may go down over a certain period of time. So for example, if you were awarded $2 million in liquid assets, and taking 70% of that, dividing by 360 months, that number works out to about $3,889 or something like that amount $3,900 a month of imputed income.

You’re not really drawing on it but the underwriters will give you credit for that. You can’t use retirement assets for that, unless you’re of retirement age. But any kind of investment assets that you’re awarded, could be used for that case as well. And then finally, the other asset based income that we look at is the potential of creating a revocable trust.

And this is a strategy that I love using because it’s a lot easier than some of the other strategies, the asset based lending type loan, that kind of thing. And, for example, you could, what we look at is that again, the continuation period has to be for 36 months. But once you set up the trust and fund it, then you only have to receive the first payment from the trust in order to qualify. So that’s a revocable trust, where the client is the grantor, the beneficiary and the trustee.

They control it completely. We set up a separate bank account, put the money that’s awarded to them in that bank account, they pay themselves and we can use that income to qualify somebody right away. So if somebody’s a stay at home parent receiving a lump sum distribution, that’s a great way to help them qualify right off the bat. And I’ve got two clients right now that we’re doing that type of program for.

Holly: So if you have the stay at home mom who’s going to be receiving a sizable chunk from the estate and can do this revocable living, or revocable trust, does that person also need to show that they are employed? Or can they qualify strictly based on these other pieces?

John: They can qualify without employment.

Holly: So this really is the best for anyone who has substantial assets in the estate. This is the way that the stay at home parent can keep the house right out of the gates.

John: Right out of the gate. Yes, ma’am.

Holly: And this was the piece that we had been talking about was like, I had never heard of this as an option. And I think it’s really important that attorneys learn about this and understand that this is an option for your stay at home parent clients, who many people have probably been telling forever, don’t bother, you’re not gonna be able to keep the house.

John: Yeah, yeah. Well, and I will say that the payments that you pay yourself are not taxable income, the only taxable part is going to be the interest you would earn on that money that’s invested. Just, it’s your own money, we’re just kind of dividing it out a little bit differently.

Holly: Realistically, how big of a lump sum do you need to have to create this type of a trust?

John: Well, it really depends on what the client is looking to do. What price home they’re looking to be in, what the downpayment they might want to put down, that kind of thing. So we sort of reverse engineer the solution, once we know what their objectives are. And I’ll go over that with you in an example here in a little bit.

But you’ll kind of see how that works in one specific situation. But yeah, so it’s really, for example, let’s say you had $200,000. This is the example I’ll go over with you in a little bit, but $200,000, and you need a down payment. So we’ll take out $40,000 for downpayment and closing costs, and you have $160,000, that you can fund the trust with.

Paying you out, paying out over 40 months, that’s $4,000 a month of income that is qualified after receipt of the first payment. So $4,000 a month may not be enough to qualify for one certain priced home. But if you combine on top of that your employment income and possibly your support income that you have already been receiving, then you start layering these different sources of income and you can qualify.

Or if this trust income is your only source of income, we just need to set the trust up and hopefully the funding will be adequate enough that we can set it up to provide whatever kind of income we need for that 40 month period to get the client into the house.

Holly: So one other option I’ve seen is having a cosigner. What does that do for? What kind of options does that give people?

John: So with home prices going up so much and also, which also leads to larger buyouts to a former spouse and also interest rates going up. It’s a lot more challenging for people to qualify now than it was just a year or two ago. And so I’m seeing a lot more and mentioning co-signers to a lot of my clients and fortunately many of them have the ability to have a cosigner.

But the cosigner needs to be a related party. Can’t be your friend from college or anything like that. It needs to be a related party. And typically you’re bringing a cosigner in for income purposes, not credit. Credit, when underwriters review your credit, they go by the lesser credit score of all borrowers.

So if your credit is bad, you can’t bring a cosigner in who has great credit because they’ll go by your bad credit. And so on the other hand, the cosigner has to have good credit too, and we underwrite them as part of the process. Just like we would underwrite the primary borrower. And so we have to factor in what their house payment is, all their debts, their income and so forth.

So all that kind of gets put together with both parties, but it can happen and I find a lot of parents that you know, they’re maybe retired, they’ve got a pension, good income, their house was paid for they have no debts. And that’s like a perfect cosigner for their child, their adult child. And I’ve also seen, on one occasion, I’ve had a child cosign for a parent. So I don’t see that very often at all, but I’ve been able to make that work as well.

Voiceover: This episode of the Texas Family Law Insiders podcast is sponsored by the Draper Law Firm, providing family law litigation in Collin, Denton and Dallas counties and appeals across Texas. The Draper Firm has represented parents in cases before multiple courts of appeals and prevailed in the Texas Supreme Court in one of the biggest parental rights cases in Texas history. For more information, visit draperfirm.com, or call 469-715-6801.

Holly: So we started getting into credit a little bit. So let’s shift gears from income and talk about credit considerations when we’re dealing with the stay at home parent.

John: So these are the two most important parts of a stay at home parent being able to qualify. You’ve got to have the income necessary, but you also have to have really good credit. And so first thing I want to talk about is what your credit score is composed of. There are five different factors that go into the credit score. The first one is your payment history.

And that counts for 35% of your credit score, then there’s your, they call it the utilization rate. And that is how much you owe, versus what your credit limit is. So, for example, if you have a credit limit of $1,000, and you owe $100, you’ve got a 10% utilization rate. If you owe $999, you’re maxed out, and you’ve got basically 100% utilization rate.

And even if you’ve never been late on that account at all, you will get major deductions on your credit score for using so much of your credit. And so that that component makes up 30% of your credit score. So if you think about things you do you sort of have control over, your payment history, and the amount that you use of credit, that’s that makes up 65% of your credit score.

And I think of it kind of like Woody Allen’s quote, 80% of success in life is just showing up. Well, 65% of your credit score, it’s just doing the things that you should do and you know to do. Then the other three components are the length of your credit history. You don’t really have much you can do about that. And that makes up 15%. And then new credit or credit inquiries make up about 10%. And then your mix of credit makes up the other 10%.

So an ideal mix might be a mortgage, an installment loan, like a car loan, or student loan, and then a couple of credit cards. And that’s really all you need to build a good credit score. And as far as qualifying goes, the first thing I advise my clients of is you need to have a way to protect your credit that you hold jointly with your spouse. Ideally, you’d like to close those accounts out after the divorce is final maybe before.

But sometimes that impacts your credit score a little bit too. So that’s a judgment call that you’d want to make. But for example, if your spouse is awarded the marital residence and the mortgage debt, and then they miss a payment, it will hurt your credit. It’ll tank your credit, you won’t be able to qualify for a mortgage for 12 to 24 months just by that one mistake potentially. And something like that could drop your score 80 to 100 points.

So I always tell my clients, if you have anything joint with your spouse, you want to be able to track if they’re awarded the debt, you want to be able to track that they’re actually making the payments. And what that might look like is you put in reminders in your calendar. You know, on the 16th of the month, I’m going to check and see if the mortgage got paid.

On the two days after the due date on the credit card bill, I’m going to check and see if the credit cards got paid. And that way, you won’t get surprised by having a missed payment affect you negatively as you try and go forward.

Holly: So what can, if we have a stay at home mom who hasn’t really ever had her name on the credit because she didn’t have any income. Is there anything she could be doing right now, or as she’s getting divorced to start building that credit and help her out?

John: So when people come to me, they’re usually in four different categories. And I always advise pulling their credit upfront to see what we have to work with. Because if we have work to do, I’d like to have as much time as possible to accomplish what our goal is. And that is to get their credit score as high as possible. But some, some clients come to me, stay at home moms, and their credit is excellent. There’s nothing that needs to be done.

Some come to me, and like you said, they don’t really have much credit, it’s all been in the name of their spouse, and for them, it’s all about building a credit profile. And there I’ve got sources where I can recommend to my clients, here’s the credit card you need to get, here’s a great installment loan that will report to the credit bureaus in three weeks.

And that way, you can get a pretty quick reporting going on, on the credit scores. And you really don’t have to have a large balance, a large limit on your credit cards. You could get a credit card with a $300 limit. And if your balance is $30, there’s, that’s a 10% utilization. That’s all, that’s all you need to build a credit score. It doesn’t have to be a $10,000 limit.

It’s just what your utilization is. And then some people come to me, their credit, needs a little bit of work, needs to be tweaked. And I’ll give you an example. I had a client last summer that she had a 610 credit score. And that’s not going to cut it. Especially she had a jumbo loan, that’s definitely not going to cut it in the jumbo world.

And, but she had the assets that we could pay down some of her debts. She had a very high utilization rate on almost all of her credit cards. And so what we did, and I’ve got a program where I can run people’s information through it, and it’s a what if simulator. If I pay down this credit card, what impact does it have? If I pay down that credit card, what impact does it have?

How much do I have to pay it down, to have the maximum impact and so forth. And so we designed a plan for her, and after 30 days, she’d executed the plan, we pulled her credit again, and then had gone up over 100 points. So you can have a significant impact in just tweaking the credit, if you know what to do with it. And then some people come to me and they’re, they need a lot more work. It’s a lot more than my expertise.

And so for those people, they may have a bunch of collection accounts, a bunch of charged off accounts, things like that. For those people, I’m going to refer them out to one of my credit repair partners, and let them kind of do that work because I, that’s just really up above my level of expertise.

Holly: So if somebody comes in that’s needing to repair their credit, what kind of a timeline does that usually take?

John: You know, it can happen, again, it can happen fairly quickly. I think you can get results in 60 to 90 days. Significant results. Certainly within a year, you should be able to have pretty much everything that’s able to be cleaned up, cleaned up. But a lot of times the creditors are misreporting or they’re violating a law. And if that’s the case, they have to remove the derogatory information immediately.

And if they don’t respond to your request, and it’s supposed to come off after 30 days anyway. So it does take longer than my tweaking analogy, but it doesn’t have to take forever to get that done. And again, it depends on the degree of difficulty of the client’s credit. You know, that’s a little bit part of it.

Holly: So another piece that these clients will need to consider is, how much cash do they need to close? And what sort of an impact does that have on the assets that are factored in and all of that. Can you talk a little bit about that?

John: It’s amazing to me that most people have heard you need to have 20% for down payment, that kind of thing. But the reality is, an FHA loan requires only a three and a half percent down payment. A conventional loan requires, for most people a minimum of 5% down there are a few 3% down programs that kind of come and go, but 5% is a minimum downpayment.

With those, you would have mortgage insurance, but the mortgage insurance expenses have on conventional loans have come down quite a bit over the last several years. And so it’s not an exorbitant amount to pay for mortgage insurance to be able to put a lower down payment down. So on top of the down payment, you’ve got closing costs and setting up your escrow account so forth.

But you can truly get in for three and a half percent on an FHA loan and 5% on a conventional loan. And that way, maybe you can serve your assets for something else. Reserve account, you know, you don’t want to run out of money while you’re transitioning into that new life.

Holly: Next, I know that there are some you know, some of our stay at home parent clients are not going to qualify for a traditional loan. And I know you have some out of the box ideas that you can give to people that may work for them. Can you share those with us?

John: So really, Holly, there are three different options I want to share with you regarding outside the box ideas. First is sometimes you can get seller financing. It doesn’t happen very often. But occasionally, that will be available. And it never hurts to ask. So that’s one potential option. The second option is a rent with the option to buy type program. There are at least a couple of companies I’m aware of out there, and my realtor friends can help with that.

Because that’s really they know that a lot better than I do. But there’s a couple of companies out there, where they will actually buy the home for you, rent it to you for a period of time, and typically not to exceed three years. And then once you’re able to qualify, then you buy the house from them. And they’ve got very thorough contracts, they describe what the leasing payment would be, plus the buying part of it.

And what they do, they will escalate the sales price. So today, it’s one price, a year from now, it might be 5% higher. So that’s pretty good in the environment, we have been in where home prices have been going up 20%. Now, they’ve kind of flattened out. But, so you know what you’re looking at, in years, one, two, and three for buying a house, when you’re in the position where you’re able to do that.

It’s not a bad option, usually people that have a little bit of credit problems, they can get into that program a lot easier than, say, getting a mortgage. So it does give you some time to stabilize, get all your ducks in a row, and then you just buy the house back from the investor. I’ve had people do that. It’s been a really good option for some people. And then finally, if you are awarded a significant lump sum, you may be able to just pay cash for the house.

I don’t necessarily recommend doing that. But it is an option. I would discuss it with your financial planner. But pay cash for the house now and then you can refinance later and pull some of the cash back out that you might need later. So that one paying cash now requires no qualifying at all. So there’s a couple outside of the box ideas that we offer sometimes.

Holly: I know there are a couple of different ratios that come into play when we’re talking about this type of lending. That being the debt to income ratio and the loan to value ratio. Talk to us a little bit about those, what they mean, and how to calculate them and all of that.

John: Sure. And those are probably the two most important ratios that I would wish that all my family law attorneys understand. Because when I talk to them, I’m going to be talking about DTI and LTV. And you know, you’ve got your acronyms in your industry and like when somebody said DWOP for the first time, I thought what the heck is a DWOP? But we’ve got ours too. So LTV, DTI.

So but the debt to income ratio is, is your total debt payments divided into your gross income. So when I talk about total debt payments, what I’m talking about is what’s your house payment is going to be. And that would include principal, interest, taxes, insurance, homeowner’s association fee, and then plus any of your outstanding debt payments that show up on your credit report.

What the contractual amount of the payment is, what the minimum required payment is on a credit card, add all that stuff up. That’s your total debt payments, and then divide that by your gross income. And it gives you the debt to income ratio. Typically, we want that number to be 45% or less. It can go up to 50. I’ve had loans approved at 50 on a conventional loan.

You can go higher than that on an FHA loan, maybe 56, 57%. Although, when you start getting that high, you’re really potentially creating a cash flow issue for the client where they’re spending more money than they really make, you know. So 45 to 50%, hold that ratio, I’m good. The loan to value ratio is going to be, how much is your loan, divided by what’s the appraised value.

So when you’re looking at buying a house, a 5% down payment is a 95% loan to value ratio, LTV. When you’re looking at refinancing, depending on how the refinance is structured, if you’re doing a cash out refinance to pay your spouse off, the maximum loan to value is 80%. We do something strategically, typically, that’s better.

And that is creating an owelty of partition on the property and then refinancing that owelty lien and their underlying financing at the same time. And with that type of structure, you can go up to 95% on a conventional loan, and 97.75% on an FHA loan. So depending on what the situation is, but DTI, LTV, those are two concepts that are really important for you guys to know.

Holly: So before we wrap up, I know you have a good example to share with our listeners to kind of illustrate these types of things. Why don’t you go ahead and share that with us?

John: Sure. So we talked about earlier, the different sources of income. And the key distinction that I want to reiterate is, what’s the difference between income and qualified income, because they’re not the same. So I want to share with you a case study, a case. I’m writing a case study right now, but it’s in process. And the wife did not get awarded the marital home.

But she did, in her decree, she receives $2,000 a month in child support, the decree was entered in January. And I’m kind of rounding these numbers to make them a little bit easier to illustrate. So $2,000 a month in child support. She’s also receiving spousal support of $8,000 a month, that will continue for 30 months, okay. And then she did go back to work. And she does have a job where she is making $2,000 a month.

In addition, she received a cash buy out of $220,000. So the house that she’s renting right now she wants to buy. And to complicate things a little bit, the owners are getting divorced, too. And they’re telling her that they’re putting the house on the market in July, whether you buy it or not. And so it’s really important for her to be able to buy this house. She and her child have already been displaced once.

She really wanted to keep the child, you know, consistent in where they’re living and so forth. So anyway, that’s how the divorce decree was set up, the settlement, and so forth. And looking at her income, she’s got $2,000 of employment income, $2,000 of child support, $8,000 of spousal support, and that is $12,000 a month. And that’s not a bad income, right. But when you look at what’s qualified, her employment income is qualified.

Her child support income is not qualified because she’s only received one payment. And it will not be qualified as of July because she will not have received six payments by then, unless we were to do an FHA loan. So that’s not qualified at this point. And then her spousal maintenance is not qualified because she only receives it for 30 months, not the 36 plus months. So she has $12,000 of income, but only $2,000 that’s really qualified.

So the house payment for the new house, if she buys it from her landlord will be about $4,800 a month and there’s no way he or her DTI is 240%. So there’s no way that that will work. And so what we’re working on for her is the employment income is good. Child support. I haven’t really touched that yet. The spousal support is the big item here.

And if she were able to go back and amend her decree, and instead of receiving $8,000 a month for 30 months, maybe a $6,000 month for 40 months. And that, then that $6,000 would be qualified income. And then we’re also looking at creating a trust for her. So out of that $220,000 that she received, we’re going to take $160,000 of it for 40 months, and that’s $4,000 a month.

And then the other, approximately $40,000 would be for her down payment on the house. And so by kind of restructuring, this is my proposal, she would be able to qualify to buy that house by July, or even sooner. So I don’t know where that one’s going to end up.

But obviously, you need the cooperation with the former spouse, and the attorneys and so forth to enter a nunc pro tunc. And I’m not sure if we’ll be able to do that. But what that illustrates is the benefit of bringing a CDLP into the mix early in the process, rather than wait to engage me afterwards.

Holly: For sure, and I think you especially want to talk to someone about all these issues before you go to mediation or before you enter into, or you’re sending settlement proposals back and forth to make sure that whatever it is that you’re planning is going to accomplish the goals that this client has.

John: Absolutely.

Holly: Because I think you know, the example that you gave, I don’t think you can use the nunc pro tunc for that, because it’s not a clerical error. So whether you can amend the spousal maintenance or not, is another issue. But property things can be very hard to change once you have a decree of divorce. So attorneys really need to be careful that they’re getting it right the first time.

John: Exactly, exactly. And you’re right, I’m not sure a nunc pro tunc would even work, would be acceptable, but.

Holly: Hopefully. Hopefully, there’s a way. Okay, well, we’re just about out of time, but one of the things that I always like to ask my guests on the podcast is this. If you could offer one piece of advice to family lawyers, what would it be?

John: And I just mentioned it, so I’ll say it again. But there is a huge benefit to bringing a CDLP into your divorce team as early as possible in the process. Even if there’s real estate involved, then I can help create a solution that is in the best interest of your client. And even at the point of filing the petition after that, you know, it would make sense to bring me in, make sure that the agreement that you come up with can be accomplished.

And I see a lot of times when people come to me after the divorce, and there’s something in the decree that really can’t be done from a mortgage lending standpoint. And fortunately, I’m able to help them create a solution, but it’s a lot easier to come up with the right solution at the beginning than to try and come up with one later.

Holly: And am I correct in assuming that there’s really no cost associated with that, because you’re getting paid on the back end, with you know, if they go forward with a mortgage through you, right?

John: Sure, sure. So we are prohibited from being compensated on the front end, because we’ve got laws such as the Equal Credit Opportunity Act, which prohibits us from discriminating on the basis of marital status. So, I can’t offer to receive income from one party and not offer it to anybody else. So we don’t receive any compensation. I provide a lot of great advice on the front end. And without compensation with the hope that if I take great care of my client that they will ultimately use me either for a refinance or to purchase the next house.

Holly: Well, great. Lots of very good advice here that hopefully family lawyers can take to benefit both their stay at home parent clients and other clients. So where can our listeners go if they want to find out more about you?

John: So my website is texasdivorcelender.com. You can also reach me at [email protected]. And my phone number is 972-523-3381. And if you’d like a copy of my case study that I kind of gave you the Reader’s Digest version of, I’d be happy to send that to you. Just shoot me an email and ask for it. And if you’d also like a copy of my divorce and mortgage timeline, I’d be happy to send that to you, too. It’s a real good graphic that shows you how we both can be working concurrently to help our mutual client.

Holly: Perfect. Well, thank you so much for joining us today. For our listeners, if you enjoyed today’s episode, leave us a review and subscribe to enjoy future episodes.