Lunch & A Divorce Lawyer LIVE with Attorney Peter Olson and Jeff Koch

THIS MONTH'S TOPIC:

HANDLE your home/mortgage right!

Where do you want to live during and after your divorce? Do you keep the kiddos in a school district? Do you create that brand new future picture including a new home?

This month we talk real estate (and divorce) with our friend, Jeff Koch, SVP of Residential Lending at Draper/Kramer. https://dkmortgage.com/koch/

Peter: Thanks for joining us and I'm really excited to have a guest this month, so you don't have to hear me blather about different family law issues and you can actually get some real expertise from somebody else.  I am super happy to have Jeffrey Koch.  We've been friends for 15 years.  He is a Senior Vice President of Residential Lending, correct title Jeff?

Jeff:  You nailed it.

Peter:  At Draper and Kramer, you're in the mortgage lending business.  Is that a fair summary?

Jeff:  Absolutely, residential mortgage guy and been doing this for 20 years, and yes almost the whole time you and I have known each other.  So, we go back and I'm excited to be here, thanks for having me.

Peter:  Let's just start here Jeff.  We're involved, me as a family law attorney, sometimes divorce attorney.  So, we're not the same and sometimes I'm actually trying to help somebody stay married, but sometimes they're going through divorces.  You're oftentimes dealing with a home at a real broad level, real generically, typically somebody's going to sell that home, a couple's going to sell the home during or after their divorce process or they're probably going to refinance that mortgage, and one of the parties is going to keep that residence.  Is that what you're seeing? That's what I'm seeing as a family law attorney, any kind of big thoughts on just to sell or to refinance, any opinion on that?

Jeff:  Well, that does touch on a few different subjects.  The first thing I would recommend on all of this is to keep in mind that timing is everything.  It's a lot easier to make your financial moves either before any divorce gets filed and begun officially or after when it's all completely resolved.  Sometimes, I have people tell me that, in preparation or in anticipation of the divorce, they want to make some moves refinancing or buying (selling and buying) and it's in the middle.  It's after they file but before the divorce is finalized and that leaves them in limbo (financially speaking) because one of the chief goals and jobs of the lender is to be able to accurately document somebody's financial picture and then includes their responsibilities and debt burdens whatever they are.  So, if you have filed a divorce or in the midst of the proceedings, but it's not yet resolved, it's really tough to get something done because you can't resolve those finances and that can leave people in limbo.  So, if they wanted to do some refinance or property transitions in the middle of that process, it can be a lot more difficult.  So, if they can anticipate, then either do it before the official process gets going or know in advance that the timing is going to be better afterwards - that's the way to go.

Now your question was, is one of those better? I think it's going to depend on the situation because rates for refinancing and purchasing are amazing, obviously.  So, interest rates are going to be very similar, so it's going to just depend on kind of their needs, whether they make a clean break and make a completely clean start or whether they just want to stay in there, that'll workout in different situations.  What's most important is that they get clear on the timing.  They say timing is everything, it's definitely true on this front as well.

Peter:  Do you walk into that fact pattern too often?  That sounds like a great idea.  I'm thinking about myself, do I walk into the idea where people are amicable enough. We're going to go through a divorce and we're going to like, “sell this house two months before the divorce.”  Do you see that situation often?  It seems like an ideal but I wonder, do you see? 

Jeff:  Yes, it definitely is out there but it's probably given what leads to a divorce, is probably the minority, but the refinance itself process, though to lower the rates and stuff like that.  I do see that a little bit more where they realize, “okay in preparation, let's go ahead and not waste any more time, let's begin a refinance and save some money” but it's in the midst after filing and they can't really.  They're just on hold then which is okay.  It's not the end of the world but it does leave them in limbo where they wanted to get resolution on that.  The refinance situation is one that sometimes people can agree to and advance because it could be advantageous to both of them to get that settled.

Peter:  Is just the fact that there's a case filed, does that kind of lend uncertainty to you, even if it's just like right and you got, “right, we're going down those tracks, we were talking about maybe an ideal where we're just still a married couple for lender purposes and we're selling, but now we've filed the divorce but from where I'm sitting like the case is just sitting there (it's just like a case and very little activity), do you care about that on the lender's side just like the case is on file?

Jeff:  Yes, I do.  It ends up coming up as in the name search.

Peter:  Right, I understand that, just like even the potential, just the open litigation, is it bothersome?

Jeff:  Exactly! That's going to leave everything in limbo and therefore in most cases, the lender is not going to be able to move forward with any financials in that case at that point until it actually gets resolved.  One time, because of that situation, somebody ended up - they weren't even sure what they did.  They started the process but it wasn't really moving forward.  Just because it was posted and it was out there, they weren't able to move forward on their financials and on their loan process.  So, in this particular one instance, they ended up just closing it out and shutting that down.  So that was fine at that point, but it does inject a lot of uncertainty and lenders can't actually at that point determine what the financial responsibilities are going to be.

Jeff:  Yes, in my worldview, I think more should sell than actually do in the divorce context.  I feel I'm going to keep my kids in the school district or something.  I'm not downplaying that idea.  The fresh start/get out from under probably a larger home than you need now that your family's getting smaller and clearly there's a financial breakup piece to this where your income is getting smaller, generally.  They said a little bit like, “hold on to the past.”  That's my psychology on it.  The fresh start on the lower mortgage payments, probably the better move but I do tend to see a lot of people want to keep the house.

Jeff:  I would agree, Peter. I see some of the situations naturally lend themselves to people stretching because now they're managing that same debt load by themselves and by the way often it comes with having to raise the loan amount to send off some of the equity per the agreement to the other party so that loan amount goes up, and now there's only one person managing that debt.  So, in some cases, you do see that people are stretching to do that and the notion is like you said often, they don't want to further disrupt other elements of their family life but it can come with a bit of a cost.  Now, the only other mitigating circumstance related to what we're talking about though is that you know finding other homes right now, that's a little bit of a challenge.  Inventory is really tight so that would be a consideration as well for sure.

Jeff:  It's been a while since I've refinanced or purchased.  Is there much of a difference on a general interest rate if I'm doing a refinance versus a generic purchase.

Peter:  Actually, it's just changed because about a year ago, the government introduced an additional rate increase for refinances that didn't used to exist.  Then the law of the land for about a year or little over a year.  We just figured that was going to now be the new normal going forward.  About a week ago, they just decommissioned that and now rates are back to on par the same.  One other thing which is good news, now that you're not paying extra for refinancing versus purchase.  That's helpful.

Another important thing maybe for people to realize is that if they do elect to stay in the home and they do the refinance, a lot of times, as we mentioned, that's going to come with this process of increasing the loan amount so they can get cash equity out to the other spouse or their former spouse and pay them off for the decree and the agreement.  But a lot of lenders end up writing that loan up because it's a higher mortgage than the prior mortgage.  In most circumstances that's designated cash out, a special kind of refinance, called a Cash Out Refinance.  Finances that are designated Cash Out Refinance, that particular kind of refinance where that new mortgage balance is higher, that comes with a higher interest rate uniformly. 

But, there is an exception that is super important which relates to if you're settling a marital settlement agreement and it's cashing out for the equity to give to the spouse per the settlement agreement (former spouse), it's no longer considered Cash Out Mortgage.  So, a lot of lenders don't always know that because it's just one of these important but sometimes lesser known guidelines with Fannie Mae and therefore people need to be on the lookout that they are really getting the best terms with somebody that's aware of the process enough with regards to divorces that they don't mistakenly get a higher rate and a rate adjustment that really shouldn't apply for that divorce refinance.

Peter:  That's interesting, totally new information to me.  So, if I'm cashing out to pay off my gambling debts (that's just a joke) or to a home remodel or kitchen remodel, a different rate than I'm paying via marital settlement agreement in divorce, that's what I just heard, is that right?

Jeff:  Yes, and in most situations that's the case.  There's a few caveats and exceptions but in most situations that is the case.  So, definitely that knowledge can be an important savings tool.

Peter:  Jeff, speaking just going down that refinance road just for a few minutes here to get some good information as we come to a conclusion here, what's always interesting to me is both sides, I think of child support or maintenance, how those are viewed on the lender's side? What is that?  Let's be the person who's refinancing and now I'm receiving a thousand dollars a month in child support, how are you viewing some of those incoming obligations?  Is that the same as my salary from my job or what's the picture there?

Jeff:  It depends on the situation.  It comes up a lot obviously and people want to/need to sometimes use that income to qualify for the type and amount of the mortgage that they want but it's very important to know in advance if possible that you can't use child support or maintenance income unless you have proof of six months history of receipt.  The bywords here are consistent and continuous and so the way that Fannie Mae flushes that out is a minimum of six months of payments but they also have to be consistent.  So, they've got to be consistent in amount and consistent in timing, so you have the situation where sometimes people receive six months, sometimes they don't even know about that and they're and they're not ready so they can't count it at all.  But sometimes they've been receiving it, but it's been informal.  It hasn't been through the State Collection System, so they've been getting these amounts and either they are varying in the timing of the month or they'll get two payments in one month.  All of that really messes with their ability to count this income.  So, if they can just make sure if it's not through the State Collection System, that they kind of get their ducks in a row because otherwise they're going to really have problems on their mortgage qualification.

Peter: That's interesting.  From where I'm at in the family law system, there's an order that says, somebody's paying spousal support, somebody's paying child support.  Do you have a lot of cases and a lot of stuff in the court system with enforcement?  In other words, are there problems with getting those payments?

Jeff:  Right.  Sometimes they're getting it but it's just the timing is in there because they don't realize how important it can be.  So, it's really good for people to get that all set up.  If they can know that in advance, they can save themselves a lot of headache and just make sure that they get it all done.

Peter:  That's interesting and then on the flip side, if I'm the person with the hypothetical child support maintenance obligation, is that equivalent power you are using or how are you viewing that if I have the obligation affirmatively?

Jeff:  Well, it's actually handled differently depending if it's the alimony maintenance versus the child support.  If it's alimony and maintenance, then we just have to deduct that obligation from your income and then we're ready to go on the ratio as long as they work out.  The tricky part though with child support is that it's just a straight liability or like a credit or debt obligation and that really changes your financial percentages a lot.  So, it squeezes or restricts your financial abilities on paper the way if they're going to count that child support as a debt burden versus with alimony where they just reduce the income.  It makes a significant difference in the percentages on how a lender has to look at it and this is according to the Fannie Mae rules or the federal rules.

Peter: I think this is like there's this money stream.  Once more like Fannie says, we view this as like credit card debt, and one's just like, “okay, your income's a thousand dollars less a month?”

Jeff:  Yes, so if it's taken off the income, that's a lot better, much more favorable for how your financials look on paper than if they have to make it or classify it similar to a debt obligation.  So, it's one of these quirks that's very relevant and helpful to know in advance obviously.

Peter:  What I was thinking about it, sometimes to obviate the need for somebody to pay maintenance, sometimes maybe you give somebody a little bit more of the property settlements.  I'm just thinking out loud that kind, I'm thinking of a recent case of ours where he did that, so now he's doing a refinance and doing some things and his income picture doesn't look any different because he kind of took care of his spousal support maintenance obligation through more of their general property settlement.  Oftentimes from where I'm sitting, it's a good closure issue too.  It's like, “okay, I'll give you X number of dollars to pay off maintenance so neither of us are thinking about it for the next 5-10 years and it is secure.  It's money in your pocket tomorrow instead of monthly for 10 years.

Jeff:  It sounds like it can be a good strategy for both parties and certainly it would be a strategic way to maximize your financial ability on paper for mortgage qualification and stuff like that, that would be very advantageous to then dispatch of the responsibilities that way versus hanging that like you said ongoing what for us, would classify as a debt burden.

Peter:  Anything else, any other nuggets of wisdom or just how is the real estate world in general just for someone who is watching us, who wants to buy a house or might be thinking about it?

Jeff:  Yes, you know the housing market is really strong.  Some folks are wondering is it too strong and actually if you look at the historical where we would be if we just average out modest appreciation over the course of time, which isn't the way it works tends to go up and down in stronger waves, but actually if you chart it out historically, we're in pretty good water here.  We don't seem to be too hot like a housing bubble like it was when you looked at it relative to the 2006 numbers, even though now in real numbers, we're higher but when you actually look proportionally, it's really-really pretty strong. 

I think the Case Shiller appreciation numbers came out today and it is about 16% appreciation nationally which is definitely a scorching, very-very strong number.  I think it might even be for a year-over-year basis.  Nationally speaking, the best numbers on record.  So, you can't continue that indefinitely or it would definitely be an issue.  But I think for right now, the biggest problem as we touched on earlier for those buyers is that inventory is definitely tight, so if people are looking to get a home, they have to come up with some as many strategies as they can to maximize both their affordability, but also how they can present themselves in a negotiation situation. 

So, there's a lot to that which would be another conversation sometime.  But, yes, it's a great market.  The interest rates are so low that I think it's an amazing opportunity still; whether you refinance, if you're going to stay or whether you're going to get a new home, these financial opportunities here are definitely very powerful.

Peter: That's interesting.  Jeff just a wrap, who's your normal ideal customer client and how can people get in touch with you if they want a mortgage?

Jeff:  Great, well, thanks for that.  I help pretty much all kinds of people with all kinds of situations.  It's residential mortgage stuff but if they end up needing to buy something under hundred thousand dollars or over a million dollars or anywhere in between, I work with all those folks and we work on the government side with FHA and veterans through VA loans and obviously just kind of the Bread and Butter conventional.  Even some niche stuff when people's income or employment is non-standard, we have some great options there.  We're pretty wide, it’s a pretty wide net and they can get a hold of me either by phone or online or through my email but I'm available online at www.dkmortgage.com/koch which is my last name.  Launching pad for everything there.

Peter:  Awesome, I'll definitely link to that in the notes and are you in Illinois only or you?  I might be moving to another State.  My next purchase might not be in Illinois.

Jeff:  Good question.  I'm directly licensed in several states and then can partner with my co-workers that are licensed in other States beyond that so I/we can handle almost everything in most States of the union, not absolutely everyone but most.

Peter:  Sounds good.  Jeff thanks again for connecting and thanks for the expertise.  I'm sure people can reach out to you with their specific questions or to put those mortgage obligations.  Thanks again for your time Jeff.

Jeff:  Thanks Peter, I enjoyed it.  See you.

Peter: Take care, bye!