July 31, 2014

Marital Liens: Lending Rules 101

93188712Marital liens are a common solution in divorce when the spouse awarded the marital home cannot refinance the property and divide the equity at the time of the divorce. Instead, a marital lien is placed on the real estate in favor of the vacating spouse for his or her financial interest to be paid at a future time.  There are different ways marital liens may be treated — working with your collaborative professionals, including a mortgage broker, during the dissolution process, is advisable to ensure you reach the best outcome for your housing situation.  Although housing situations and decisions around them may be unique, here are a few lending rules to keep in mind:

 Rule #1 – The balloon date for a subordinate marital lien should be longer than 5 years. If the martial lien created in the divorce decree will not be satisfied by refinancing, the subordinate lien must not balloon within 5 years, per Fannie Mae guidelines. However, if the party keeping the house does not need to refinance OR the lien will be paid in full with a refinance, then this rule doesn’t really matter.

 Rule #2- The marital lien amount should be discussed in the “Homestead” section of your decree.  Sometimes a dissolution decree will attach an appendix, summarizing the asset and debt division and creating a “cash equalizer,” with a net amount owed to one party.  Placing the owed equity from the marital homestead in this section will cause the refinancing and pay off of the equalizer to be treated as a “cash out” transaction, and will in turn place restrictions on refinancing (e.g. higher interest rate, limited loan to value ratio (LTV).  However, if the lien is discussed in the homestead section of the decree, as a “marital lien” specifically, it will be considered as a buy-out for equity in the home and the transaction will be treated as “rate & term” by lenders, with a higher LTV ratio and lower interest rate.

 Rule #3 – Shared percentage liens must include a dollar amount at the time of entry of decree.  At the time of entry of the decree, shared percentage liens must include an actual dollar amount. Recently, it has been common for both parties to share in the future equity of the home in what is called a floating lien. This is supposed to be in lieu of a fixed dollar amount, but lenders need to calculate a combined loan to value ratio when refinancing. Consequently, an exact dollar amount is still needed. This lien can be modified over time if certain language is included in the decree, but an actual dollar amount with which to start, must be stated.

Rule #4 – Calculation details needed for “Floating Liens.” If you choose a shared percentage lien or floating lien, take care to be specific regarding the formula for net proceeds division. Make sure that everyone agrees to the calculation method so that the clients, underwriter, and title company know how exactly everything is to be paid out.  Running sample scenarios, prior to drafting the calculation method, will ensure agreement on the calculation formula and avoid needless future conflict at the time the lien is satisfied.

Elizabeth I. WrobelABOUT THE AUTHOR
Elizabeth Wrobel

Elizabeth Wrobel, JD is a partner with Wrobel & Smith, PLLP. She practices in the areas of collaborative family law and health insurance disputes. Although Elizabeth’s legal roots are in government practice, she now enjoys working directly with real people and their real-life challenges. Elizabeth’s passion for helping families is met in her collaborative law practice where she can use creative problem solving to assist families through the challenges of transition. Elizabeth understands that conflict can be expected, but how the professionals respond and guide a couple through divorce is critical in minimizing the harm.

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