If you are a homeowner considering divorce, you may be wondering how real estate, assets, and liabilities get divided in a divorce. My guest here today is an expert in residential lending. And in fact, John Snell is one of the first individuals to be licensed as a certified divorce lending specialist. He is here today to talk with us about how real estate can be used to help negotiate a win-win in a divorce. It is great to have him on the show.
One of the biggest questions that people have, when they’re coming into the divorce process, is trying to imagine, “What happens to the mortgage that my name’s on?” “What do we do with the real estate?” “Do I have to sell it?” “Can I keep it?” And so, I wanted to sit down and talk with you about what you’ve seen in your experience and what options people have.
- What was your road to helping people with mortgages?
- What is the difference between a warranty deed versus a deed of trust?
- Can you simply take your name off the note if the other spouse is keeping the property after divorce?
- If we have a mortgage with both our names on it, but my spouse keeps the property in the divorce, what happens if I try to get another mortgage later?
- What is a deed of trust to secure assumption?
- How can that equity be used in a divorce to help cash somebody out and get the deal done?
- Can you access a HELOC if you have an underlying mortgage?
- Once you do a cash-out refinance, is it possible in the future to take more cash out of the house if you need it?
- When is a good time to bring in an expert like yourself into the divorce process?
- What will a lender look at in terms of income, and what can we do to help people maximize the settlement so they can qualify in the future?
- How long does child support have to be paid to count?
- What are factors that impact the interest rates?
- Is the credit score I am looking at as a consumer the same credit score that the lender is going to be looking at?
- Are there any ways to know where you’re going to stand?
- Having worked with a lot of families who’ve gone through the divorce process, what message of hope do you have for somebody who’s facing divorce and going through that process?
What Was Your Road to Helping People With Mortgages?
I entered the mortgage profession through a corporate layoff back in 1993. I would never have chosen it, but somehow I was talked into it and found that I really loved helping people with their mortgages. The divorce niche came later, but not a whole lot later. I noticed that so many people that came to me after divorce had scars – financial scars, not to mention emotional scars. But, it made it hard for them to qualify for that next mortgage a lot of times. And so I always kind of tucked that in the back of my head.
But I actually starting to get proactive about it when I met a gentleman by the name of Hal Davis. He was an attorney in Collin County, and he had a concept called civilized divorce. This was probably 20 years ago. Back then, mortgage licensing was handled by the state of Texas, and they had an exemption for attorneys. So you could get your mortgage license if you were an attorney because you’re so smart, right?
And so Hal had this idea. He wanted to have a one-stop-shop where he would handle the divorce and also do the refinance that comes with that when you’re trying to take an ex’s name off the original loan or buy them out. But he needed a broker to sponsor him. So, he was referred to me, and I talked with him a little bit. I thought this was a win-win for both of us.
The very first transaction we did, I had to do all the work. So, I went back to Hal, and I said, ” Listen, you know the commission split I gave you originally, I’m going to invert it. I’m going to keep the lion’s share, and I’m going to give you a good part of it. But I’m going to continue to do all the work.” And he was very thankful, I think, for that opportunity, because he recognized, with that very first transaction, how much work goes into getting a mortgage and processing it and packaging it and getting it closed. So that’s how I sort of got into the divorce lending niche.
Several years later, I became much more intentional about it. And to the point where I go to CLE classes that the attorneys have. I trid to go to whatever seminars and luncheons they had so that I could learn your business, your side of it. So it makes me a much better lender in the divorce world. And so I love it, it’s my passion, and I love helping people get through the process.
Well, that’s great. And we are definitely going to talk about how home equity can be used to help facilitate a settlement or a positive outcome. And also the things that people really need to pay attention to, because if it’s done incorrectly, that divorce can be a scar that people have to live with for a very, very long time. Let’s back up and talk a little bit about some of the real estate financing basics.
What Is the Difference Between a Warranty Deed Versus a Deed of Trust?
It’s not uncommon when people come into my office for them to say, “Hey, we own this property. He/she had it before marriage, and my spouse put my name on the deed.” Then we pull up the records, and in fact, their names are on the deed of trust. What is the difference between a warranty deed and a deed of trust?
There are three major documents in every transaction. You’ve talked about two of them, the warranty deed, and the deed of trust, and then there’s also the note. So all of the paper stuff you sign at closing are fillers, but those three are the main documents. There are several different types of deeds, but we’ll just be generic – the warranty deed actually is the document that transfers title from one party to another. And so, if your client said they were put on the deed, there would actually have to be a deed filed that added him or her to the property ownership.
And we always talk about title. I mean, it seems pretty basic, but that’s the ownership. That’s what gives you the actual right as an owner of the property – if your name is on the warranty deed.
Correct. The deed of trust is the document that secures the lien that gets put on the property, the borrowing. And so that’s the bank’s document that they use, if they need to foreclose on you, it spells out all the conditions and requirements that you as a borrower must meet to keep ownership of the property. So if you don’t meet those requirements, as my title friends will say, “If you don’t pay, you don’t stay.”
It’s also the document they will use to release the lien if you pay that loan off at some point in the future. So those are the two primary documents. And then the note is your promise to pay that new debt that has been created.
Can You Simply Take Your Name off the Note if the Other Spouse Is Keeping the Property After Divorce?
In the note are the terms like the interest rate and the payment and how it gets paid out, right? So if your name is on the note, can you just simply take it off the note if the other spouse is going to keep the property after divorce?
Despite what some people might say, the answer is probably “No.” It used to be possible, but in the last 20 years or more, all of the loans get packaged up and sold as a security on the secondary mortgage market. And so those investors who buy those loans or the package or buy a share would have expectations that each loan in that package meets certain criteria. You try and take one of the borrowers that you use to qualify out of it; they just can’t do it. So realistically, the only way to get your name off the loan is to either sell the property or refinance it. And that’s really kind of where I come in. That’s my specialty.
Absolutely, and it’s really important in the closing documents and the decree to make sure that that’s spelled out. Otherwise, after it’s all done, you can’t force the other side to refinance or to sell it. It’s theirs, and your name’s on it.
If My Spouse Keeps the Property in the Divorce, and the Mortgage Was in Both Our Names, Will It Hurt My Chances of Getting a Mortgage Later On?
This comes up all the time. I remember at the end of a presentation to a group of attorneys, one attorney actually came up to me. He’d been practicing for 30 years. And he said, “John Snell, I did not realize what you just told us.” I get calls from mediations because one party doesn’t believe what they’re being told. But the reality is if your property and the debt get awarded to the other party, then that doesn’t count against you when you need to go and buy your next property.
There is one caveat to that, and that is you’re still obligated in the eyes of the lender. But if you don’t make your payments, it will ruin both people’s credit. So you have to make sure your ex continues to make the mortgage payments, even though it won’t count against you from qualifying on the next house.
So assuming that they stay current on the mortgage and they’re meeting all of their obligations, it shouldn’t necessarily hurt you going forward to get another mortgage.
It doesn’t hurt you at all, unless they are delinquent in the mortgage. Then your credit is going to go down in flames with theirs. One mortgage late can cause your score to go down a hundred points. It’s quite possible; it depends on what the rest of your credit looks like. But it’s a huge hit to your credit. And often, lenders will require you to wait a period of time before you can qualify if you’ve had a late payment on your mortgage.
Right. So I think it’s important to have some recourse built-in if they end up defaulting on the note. That’s where it helps to have a lawyer who has had some experience in this area.
What Is a Deed of Trust to Secure Assumption?
Going back to the three documents I talked about before, those are typically used when you buy a home or refinance a home. You’re going to have very similar documents in a divorce case. So you might see a deed of trust to secure assumption. That allows the departing spouse to have some recourse against the spouse that’s keeping the property.
So like the situation we were just talking about, where the other partner keeps the property, and they’re on the mortgage, but they’re not refinancing it, so your name is still on the note. If they default on that, then you have some recourse.
So that basically allows you as the departing spouse to come back and, in a sense, foreclose on them, take the property back, take control of it. And then you have control of what happens to the property. Unfortunately, you may be two or three payments late because of your ex by that time. And then that really hurts your credit. But that is really the recourse that you have as a departing spouse.
How Can That Equity Be Used in a Divorce to Help Cash Somebody Out and Get the Deal Done?
For a lot of families, the home is their biggest asset, and that’s where most of the value is in the estate.
It is a great asset to have. And the tools that I bring to the table to help get at that asset are through a refinance. So as you develop your division of the assets and liabilities, that becomes part of it. And typically, what I see is that one spouse that wants to keep the house has to pay the other spouse their share of the equity or whatever the agreed-upon share is. That can be done a few different ways, but basically, we do a mortgage that would allow that money to be freed up out of the equity of the home and pay it to the departing spouse.
I want to talk about the different ways that that gets accomplished because this is often something that can be really complicated and confusing to people. So let us boil down what those different options are.
Generally speaking, there are three different ways to do it. The first would be a Home Equity Lines of Credit (HELOC). And a home equity lines of credit, that’s a home equity loan in the state of Texas, typically have lower costs, but if you already have an underlying mortgage, you are going to have to pay off that underlying mortgage with the HELOC. And so they’re not necessarily a good option in my opinion unless you’re just borrowing a fairly small amount, your property’s free and clear, I think that’s a pretty good option for that.
One of the reasons they’re not great is that they are adjustable. And if you’re paying attention to what’s happening in the economy now, inflation is just going crazy. And you’re going to start seeing these adjustable rates that are home equity lines of credit just go up. So if you have a significant amount of money borrowed on a HELOC, it’s going to cost you a lot more going forward.
Can You Access a HELOC if You Have an Underlying Mortgage?
Well, you can. Part of the issue of refinancing is to remove the spouse from the loan so you have to pay that loan off, anyway.
So you’re not going to be able to complete the refinance process to remove one of the partners if you’ve got the mortgage and a HELOC?
You could, but just setting up a HELOC in and of itself, I don’t think it’s a great idea. And that brings me to a second option, which would just be a straight home equity loan. Fixed rate, you pay off the existing mortgage, you then can pull cash out of the property, pay it to the ex. And that’s to me, a lot simpler, especially if you already have a mortgage on the property. I think that’s a way to do it.
It’s called a cash-out refinance. Some people call it cash back, home equity loan. There’s a few different terms out there that people use, but typically cash-out refinance.
Once You Do a Cash-Out Refinance, Is It Possible in the Future to Take More Cash Out of the House if You Need It?
You can do that in the future. You have to wait at least 12 months after you’ve done your first refinance. The downside to cash-out refinance – it’s not necessarily a downside – but one factor is that the most you can borrow is 80% of the value. So if you pull all your cash out initially, and you wait 12 months, and you want to do it again, you may not have the equity to access much more than you’ve already taken out. So that’s an issue with cash-out loans. The other thing about cash-out loans is that they tend to have a higher interest rate and higher closing costs.
Then the third option is an Owelty Lien refinance. Whenever I ask clients if they’ve ever heard of that term, they say no. No one’s ever heard of it. And if you go look the word up in the dictionary, the root of that word is equality. And the concept is to equalize an asset, divide it, partition it – you see that word in your documentation – in a way that an asset typically can’t be divided, like a piece of property. You can divide bank accounts pretty easily. Property is not. And so that’s where the concept of the Owelty Lien comes in. How that works is through the divorce process, the settlement, a new lien will be placed on the property, a second lien on the property.
And so, you’ll have your existing mortgage with one of the banks. Then you create a second mortgage on that property and think of it like pooling or home improvements; it is the same thing. Only the creditor or the benefactor for that second lien, that Owelty Lien, is going to be the ex-spouse. And so that’s how the buyout is able to be taken care of. We create the lien, and then I come back in and refinance it, pay off the current mortgage and then the Owelty lien, and then the spouse gets their buyout proceeds. The Owelty Liens are going to be a little bit lower rate, a little bit lower fees. And so, to me, it’s a better solution than the cash-out.
And so when we talk about the benefits of the Owelty, like you just said, lower interest, better terms. And I think the third thing that’s really important is that you are not capped at that 80 20 divide ratio.
You’re correct. So it depends on the type of mortgage that you do, but a conventional loan, you can go up to 95% of the value of the property. And on an FHA loan, you can go up to 97.75%, which is pretty, pretty amazing. VA is only 90%, so I would never put somebody back into a VA-type loan. So if you’re in a situation where you don’t have that much equity in the property, you’re going to be able to stretch the buyout a lot more with an Owelty lien refinance than with the Texas cash-out.
Okay. That’s great. So we’ve covered the idea of using a HELOC, the home equity line of credit, we’ve covered doing the cash-out refinance, and the owelty lien. Now I would think in the negotiation process, one thing you’d really want to know is whether the other party or you are going to be able to qualify for refinancing.
When Is a Good Time to Bring an Expert Into the Divorce Process?
Well, I always say as soon as possible. And so, I have a lot of clients that I will meet with before they even file. But certainly, once they filed, they want to keep the house, or even if they don’t want to keep the house, they want to buy a new house when the divorce is settled. It’s best to know where you stand as soon as possible. So that way, I have the opportunity to create that plan to make it happen for you, whether it’s to refinance the house or buy another house. There are a lot of issues that come up, potentially credit. If I have time to help somebody clean their credit up, that helps to have more time to do that. Also, when you get to the point where you’re trying to settle, it might make sense to look at child support, alimony, or spousal maintenance, that kind of thing. And that can be structured to even help that person qualify.
What Will a Lender Look at in Terms of Income, and What Can We Do to Maximize the Settlement So They Can Qualify in the Future?
Because when you talked about the scars of divorce, being able to qualify in the future for another mortgage is really important to people in recovering from divorce.
Sure. So, several different sources of income can be used for qualifying. And just because you receive that income doesn’t mean that in our world, it’s considered qualified income. So you really have to take a look at what you’re receiving and is it qualified? So, for example, I talked with a client last week, and she told me she’s going to be getting $2,300 a month for child support, $3,000 a month for two years for spousal maintenance. And then she has had a part-time job for about a year, making about a thousand dollars a month. So if you add all that up, you’ve got like $6,300 of income.
And then I had to painfully go through each one of those and tell her, well, “For part-time work, you have to have a two-year track record of it for it to qualify.” So she’s trying to get a full-time job, which is great. Secondly, the child support. “How old are your kids?” “One is 15, and one’s 13.” Well, sorry, but you can’t get the $2300 because your child support typically ends when the child turns 18 or graduates from high school. So that income’s probably not going to be acceptable.
How Long Does Child Support Have to Be Paid to Count as Qualifying Income?
For child support to be considered a qualifying income, you have to have received it for six months. And then, it has to continue for three years, 36 months after the mortgage is closed. So when you see somebody that’s 14, 15, that’s going to be an issue in using that for qualified income. I said, “Well, you can use the income that you’ll receive for the second child because they’re going to be under that three-year mark.”
So that dropped her income to about $1,800 on the child support. And then the spousal maintenance, “Sorry, you can’t use that because it’s only lasting for two years.” If I were to have been brought in at the beginning of the case, and I was referred to her after mediation, the divorce decree already in draft form; there’s really no way to go back and change that. But I would have suggested maybe not receiving the spousal maintenance of $3,000 a month for two years. How about $1,500 a month for four years? And then it’s the same amount of money, but it now stretches that time period out for the receipt of it. Now we can use it for qualifying income.
So that’s kind of an example of having the ability to brainstorm, consult with somebody on the front end. But going back to your question about income, generally speaking, we want to see a two-year track record of employment income for stay-at-home moms. A lot of times, they’ve been out of the workforce for a while, but they need to be back in the workforce for six months. It needs to be a full-time W-2, can be a contractor or that kind of thing. And it can be part-time; part-time is okay if you’ve got a two-year track record.
That’s what we’re looking for for employment income. It’s pretty much the same guidelines for alimony, spousal maintenance, and child support. You have to have received it for six months and then must continue for three years after the mortgage is closed.
So, that’s really helpful. And I’m just thinking now, as a divorce lawyer how important it is to bring you in in the early part of the negotiation. One thing that my clients are really worried about is the interest rates. That’s such a big part of the mortgage.
What Are Factors That Really Impact the Interest Rates?
That’s a question I get all the time, “Where are interest rates going?” And probably for the last decade, we have had all the major real estate economists, every single year forecasting “Rates are going up, rates are going up, rates are going up.” And they’ve been wrong throughout. I just pretty much dismiss it. But there are really two different factors that come into play as far as interest rates go. There’s the macro-level factors, and then there’s the micro-level factors. So on a macro basis, inflation is the evil enemy of low mortgage rates. So as we see inflation happen, you’re going to see mortgage rates go up. It’s just a question of how fast. The federal reserve, over the years, has done a really good job of keeping that in check, and they have their tools to make that happen.
They recently announced that they were going to stop purchasing as many mortgage-backed securities and treasury notes, which is a signal to the market that rates are going to go up. So the investors are starting to price that in accordingly. There are monthly reports that come out about employment, inflation type reports, that sort of thing. I always look at the monthly jobs report because that’s telling me the heartbeat of where the economy’s going. If you see a strong economy, lots of jobs being created, you’re going to see workers who are more confident about looking at other opportunities to increase their income. And that’s very inflationary in the economy. So, the monthly jobs report is a big report I watch.
Another thing that we see right now, is geopolitical-type factors. When the virus spiked, you saw the rates go back down because when there is bad news in the world, people tend to move their money. The institutional investors move their money out of stocks into safer havens, like the bond market. And so that’s good for lower rates.
You see Russia looking at Ukraine again; you see China looking at Taiwan. Those are things that create tension and fear in the markets. And so you may start to see the rates tempered and not rise up as fast if something happens there. So that’s geopolitical. And then, on a micro-level, your interest rate, my interest rate, is determined largely by how good our credit is. And so that’s a huge factor.
Is the Credit Score I See as a Consumer the Same Credit Score That the Lender Is Going to Be Looking At?
It is not. I have this conversation with almost every client because everybody is monitoring their credit these days. You have the opportunity to monitor your credit. Whether your credit was hacked by somebody previously and the bureaus offer you free credit monitoring, or most of the credit cards now offer you a monitoring type service, so everybody is monitoring their credit.
The issue is there are probably 70 different credit scoring models. So the one that you have access to is just a consumer model and is different from, say, a model that would be used for auto loans or home insurance, or even mortgages. So when it comes time to look at getting a mortgage, the important number is to be what the lenders are looking at. And I always tell people, it’s great to have a credit monitoring service just to give you relative numbers, but when it comes time to look at getting qualified for a mortgage, you should have a lender pull that credit for you, so you know exactly what the scores are going to look like.
So, you don’t really know what your score is till a lender pulls it. But then the lender pulling it can have a negative impact.
Are There Any Ways to Know Where You’re Going to Stand?
Well, that’s not necessarily true. That’s a misconception that a lot of people have that, ” If I’m pulling your credit, your score is going to go down, and everything is going to be catastrophic.” And the reality is one credit inquiry from a mortgage company or any inquiry really is only going to make a difference of a few points. And so, if your credit is already really, really good, it would be totally insignificant. If your credit is really, really bad, it might be the difference between being at one threshold versus dropping down to the next threshold. And so I tell people, “You want to know, don’t be in fear. If you don’t want anybody to pull your credit, you really won’t know.”
And then the other thing is that the credit scoring companies anticipated this, and so, for example, you could have your credit pulled an infinite number of times by mortgage companies within a 30-day period. And that only will count as one inquiry against your credit, the same thing with auto loans. So it’s not good to go crazy with that and get a bunch of new credit cards and all that. But it really isn’t as significant as people think it is when it comes time to get a mortgage.
What Message of Hope Do You Have for Somebody Who’s Going Through That Process?
Well, I’m sure you’ve gone through tough times; I have. Anybody who’s been in the real estate business in 2008 knows what tough times are. But one of the things that have always helped me through a tough time is the old adage, “This too shall pass.” And I think a lot of people, when they’re going through a divorce, are just so focused on the situation they’re in that they can’t see that this too shall pass. “This is really painful, but it’s only going to be for a period of time, and then I can move on.” So, “this too shall pass” is one thing I would say.
Another quote I love is by the author, Mitch Albom. And he says that “All endings are also beginnings. We just don’t know it at the time.” And so if I could give anybody encouragement, it’s, this too shall pass, and now you have your opportunity for a new beginning. And if you focus on the positive, you’re going to create a positive outcome. If you focus on the negative, you’re going to get a negative outcome, but this is a chance to start over and create the life you wish you had before. Another thing is to google divorce affirmations. There are some amazing affirmations out there that can help encourage people.
That’s great. Well, you’ve given us some really good words to live by, and I think a strong message for people. They need to know they have options and that tapping into that home equity can be a great option in divorce. If you want to learn more about John Snell and how he can help divorcing homeowners make the best decisions, visit his website Texas Divorce Lender.