As discussed in the first episode of our “Real Estate In a Divorce” series, one of the most significant factors divorcing couples face is what to do with the family home, and often, what to do with that home and the mortgage can be a challenge. In this second episode of our series, Ryan Segall is joined by Mortgage Lender Alejandro Juarez to delve deeper into the complexities of mortgages and their significance in the context of a divorce in Texas.
Your hosts have earned a reputation as fierce and effective advocates inside and outside of the courtroom. Both partners are experienced trial attorneys who have been board certified in family law by the Texas Board of Legal Specialization.
Ryan Segall: Hi everybody. My name is Ryan Segall. I’m one of the partners here at Walters Gilbreath, and thanks for tuning into our podcast, For Better, Worse, or Divorce. Today I am joined by Alejandro Juarez of the Juarez Group. Alex is a lender down in Austin, Texas, and he’s here joining us today as part of our summer real estate series. So, Alejandro, welcome.
Alejandro Juarez: Thank you, Ryan. I appreciate it. I’m looking forward to chatting with you. So thanks for having me on the show today.
Ryan Segall: And thanks for taking time out of St. Patrick’s Day to be here.
Alejandro Juarez: I know. I’m the only one wearing green today, buddy.
Ryan Segall:Sorry about that. So Alex, tell everybody out there what you do and how your role in real estate is involved.
Alejandro Juarez: I think a lot of the times when people begin to get into the process of purchasing a home, they often start with immediate thought is finding a realtor, which is fine. That’s great. A good realtor is really important. They definitely serve their aspect of the purchase, but I’ve always thought of the tandem of the realtor and mortgage professor to be very split. Realtor is very property sales, price appraisal value. Everything related to the property is realtor. Mortgage lender, everything that has to do with your finances, the decision, the mortgage structure, all of those things. And it turns out I really enjoy the job. I never thought I’d get into this career a long time ago. You’ve known me for a long time and I think that me being a lender was something really unexpected, but I found myself really loving it. And most importantly, I found that the industry had a lot of missing pieces as far as education goes.
I found really quickly that people really had no idea what was going on with their mortgages. They didn’t understand how lenders were structuring them or understand what the long-term implications of their finances would be over the decisions that they were making. So we just sought to build out a branch that focused primarily on that, on educating clients, informing them, giving them options, and then letting them make decisions that they felt were in their own best interests. So we’ve been doing that now for eight or nine years and it’s been going really well. Obviously Austin is a great market, but we work all over the place in Dallas and Houston, Midland, all over Texas, so it’s been good.
Ryan Segall: Great. So let me ask you this. If I’m to buy a house, I’ve got my real estate agent, where do you come in that process?
Alejandro Juarez: So where I come in the process should be ideally from my perspective, before the client ever even begins to look at houses. A lot of realtors might not like me saying that, but I find that it’s like putting the cart ahead of the horse when you start immediately searching for homes. Because a lot of the times people will fall in love with homes and then realize that they can’t actually approve for them. So the first thing that should happen really is you meet the realtor, you might talk about the general idea of what you’re trying to accomplish and then immediately connect with your lender to figure out how far you can go in terms of an approval, what you’re allowed to purchase. It has to happen before the house search starts because mortgage is way more complicated than most people realize that it is.
Ryan Segall: Sure. And let’s use that to transition to how our jobs intersect, so to speak. So in our line of work, oftentimes married couples are going to own at least one house if they’ve been married for an extended period of time. They own a house together and then they realize they’re going to get a divorce. So what do we do with the house? And in our line of work it is, well, one person is either going to get it or the house is going to get sold. When do they come to you in that scenario as try to figure out how this is going to work going forward once these two end up splitting apart?
Alejandro Juarez: I think a lot of the times, at least in my experience, it’s happened really early. Most of the clients that we have, that we close in situations like this are just in the beginning phases of the conversations that they’re going to have with their attorneys about how they’re going to get divorced. But that is usually already in motion. So, what I have found is that with a solid plan and with two spouses or ex-spouses that have the willingness to help one another and that have the willingness to understand how complicated and how complex that situation can be, if they’re both in a place where they’re willing to help one another, you can make a lot of things work.
But when that’s not the case, and I’m sure you’ve run into a lot of situations when it isn’t the case most of the time, if not all of the time. In those scenarios, you just have to wait until the dust settles for the divorce decree to be complete, to be finalized and then determined who got what, what ended up happening and where are we going from here. But if both sides are amicable and they’re willing to help, there’s a lot that you can do before that decree gets finalized.
Ryan Segall: Sure. And from our perspective, what we’ll usually see is the people, especially nowadays, want to preserve that interest rate that they got in what 2020, 2021 or so. So, I guess speak a little bit on the advantage of keeping that interest rate versus what happens if you refinance now.
Alejandro Juarez: That’s a huge issue for not just people in that situation, but pretty much every homeowner right now that was able to secure a low interest rate and is thinking to purchase a new home. And in that situation, it can be financially, for lack of a better term, I guess, damaging just because a lot of people right now are like myself in interest rates that are in the 2’s, 2 and a half, 2.7, 3%. And right now, you’re looking at mid to high 7’s in some cases for people with not great credit, you’re looking at 7’s and 7 and a half.
So, refinancing the mortgage to provide the equity needed to essentially give to your partner to let go of their ownership interest, that can be really difficult because now not only are you creating a larger loan -and therefore a larger mortgage payment, you’re also essentially wiping out the old one that you had and replacing it with whatever current market rates are. So whoever ends up keeping that responsibility is now bearing a much larger weight of responsibility than they would have when the house was originally purchased.
Ryan Segall: And from our perspective, if let’s just say I’m representing the wife and she wants to keep the house and she can afford the mortgage payments now, but if you refinance to your point, those rates are going to skyrocket and that’s going to affect the monthly payments too.
Alejandro Juarez: Not only the monthly payments, but potentially also the approval at all because now you’re not counting both incomes. Now you’re only counting one income, but that one income now must support a much higher interest rate to get to that same approval status.
Ryan Segall: Let me ask you this. When a lender is looking at that approval in that scenario, does the lender look at the potential assets that could be awarded or does the lender look at what they have now and split it? I guess how do the assets they currently own versus what they may own once the divorce is finalized?
Alejandro Juarez: So, the lender essentially is going to look at if the divorce has begun and if the separation has already started. Generally speaking, the lender to some degree will say, “We’re not doing anything until the divorce decree is finalized,” except in situations where we can guarantee that the ex-spouse will show up at closing and sign the closing documents. So let’s say for example, you have a husband and wife. The wife is refinancing the home and doing a regular cash out, not an owelty lien cash out, but just a regular cash out. They’re going to keep the house, pay the spouse, the spouse is going to give up their share, they’re going to get off of the mortgage. As long as that spouse is willing to sign the documents, they’ll let them close.
But there’s a problem in that case, even though they weren’t on the mortgage, they’re still on title because it’s Texas and it’s a community property state. So the ownership split would have to happen once the divorce decree was finalized and then they could be released. But that also presents, I’m sure, complications on your end. So it can be very tricky, but it is possible.
Ryan Segall: And you mentioned something and just wanted you to explain a little bit on what is the difference between a cash out and an owelty lien?
Alejandro Juarez: So a cash out refinance has limits to how much you’re allowed to pull out of your home. A cash out it will only let you borrow against 80% of the value of the home. So if you have an owelty lien situation, they will let you pull up to 95% of the value of the home. So let’s say a home is completely paid off and the house is worth $200,000, then you can pull 80% of that out on a normal cash out. But a lot of the times when you have a divorce, they don’t want to split 80% because the spouse that’s keeping the house is keeping the other 20% of value, if that makes sense. And they want to split it exactly down the middle. You can’t quite do that with the house without selling it completely.
So the owelty lien is essentially as close as you could possibly get to that because you’re pulling out 95% of the equity of the home. It is the only time that you’re allowed to do that with a cash out is in the situations in which you have a divorce decree that is finalized, then they will allow you to do an owelty lien.
Ryan Segall: Got it. So that owelty lien, do they get the cash right then and there at closing, or is that something, because I know there are also types of liens that will sit on the property until it’s sold or refinanced or something like that.
Alejandro Juarez: Yeah. Those would be more like HELOCs, which would be slightly different. A HELOC I think could be maybe a clever solution for what is currently happening right now where people are refinancing mortgages and going from a really low mortgage to a high one, but I’ll get into that in a second. But the money from a regular cash out on a primary residence is essentially released about three days after closing. So there’s basically a three day rite of rescission on any primary residence refinance. So, you close on the refinance, you go to the title company, sign all the documents, and then they count three business days and then release the funds. But the funds can be released directly to the other spouse and then you call it a day. They aren’t done the same day. But in essence, for the most part, yes, within the same week.
Ryan Segall: And I’ve had this conversation with you before. If you’ve got a settlement, so let’s say we have a mediated settlement agreement, but it’s not finalized and we’re still waiting for the final decree to be signed, will that MSA be enough? Does it need to have a judge’s signature?
Alejandro Juarez: It has to have a judge’s stamp on it. So that’s what a lot of the times gets in the way is because you’re done, but you’re waiting for that to get in front of a judge and get stamped. So then sometimes that can become a really big problem.
Ryan Segall: Sure. Because here’s the problem from our perspective, let’s say I’m representing the wife and the wife says, “I want to keep this property, husband agrees, and we just need to refinance the house within 60 days.” But the problem is you can’t refinance the house until you’re done and the husband, he’s going to say, “Well, I’m not signing this because my name’s still on that lien or the mortgage rather.”
Alejandro Juarez: It becomes a game of chicken and egg a little bit. I mean from your perspective, I cannot imagine how precarious those conversations can be. And that’s why I was saying earlier, if the sides are amicable and there’s still a lot of good faith there, I think things tend to work out just fine. It’s when that’s not the case, then things can get obviously contentious and complicated.
Ryan Segall: Alex, there’s a reason why I’m still employed. It’s because 90% of these people are never amicable.
Alejandro Juarez: We had one recently where it was very amicable. They both helped each other qualify as co-signers. They didn’t want to wait for the divorce decree to be finalized. And they are essentially, he bought his house, she bought her house, they sold the house that they owned, split the profits and then cosigned on each other’s home. They’re going to wait for rates to come back down. And then when they refinance, they’re going to refinance each other off their mortgages. But by the time the refinance comes, the divorce decree will be finalized. So at that point, a little bit easier, but they were willing to go through that. But like you mentioned, I mean, 95% of couples are probably not going to do that, but those are scenarios in which it can be much easier.
Ryan Segall: Yeah. And let me ask you this. In that scenario, did anyone do any, we call them DTSA, the deed of trust, a secure assumption – did they do any of that in that particular case?
Alejandro Juarez: I don’t recall. It was a while ago, but both of them had to sign on each other’s properties. So they essentially both own two properties and both are on each other’s mortgages. So that won’t be able to get addressed until they come back and refinance. So they both fully own both properties right now, which in 95% of divorces, I would imagine is not an ideal situation. But for them in their situation, they were fine with it and they rolled with it.
Ryan Segall: If you can get it to work, especially with these interest rates like they are right now, if you can work with the other spouse, I think it’s by all means, everybody is going to save money if you can do it this way. But I think it really, what it boils down to is whether or not these two can coexist afterwards. If you’re going to keep both names on the mortgage because you’re going to have both people on the house.
Alejandro Juarez: So, I actually have a question for you, and I know I’m not the boss here, but I have an interesting question for you.
Ryan Segall: You’re wearing green, you get to have the floor.
Alejandro Juarez: So this is something that happens a lot that I feel can be really dangerous. There are times that, as an example, they’re splitting up a house and the client comes and says, “Well, I’m refinancing my wife off of the loan. She just wants 40K for the house and I’m going to pay her. I have this saved up, I’m going to pay her, and then she’s going to move on with her life and she’s happy.” So that’s the general idea that they have in their mind. But then there’s an obvious situation where sometimes it’s in reverse where the client is not the person that’s keeping the house. They’re the one that are giving the $40,000 to leave the house and to give it up essentially. So imagine somebody’s telling me, “Hey. You take these 40 grand walk away from the house and then the house isn’t yours anymore.”
What I tell those people all the time is to be very, very careful because if you were a co-signer on that mortgage, that mortgage is tied to your credit. So you’re essentially leaving it in the hands of someone that may not care that much about what your credit profile does. If they miss a mortgage payment and you moved away from the house and it’s three or four years later and they abandoned the home, or something happened. For example, they didn’t want to pay it off anymore, there was a catastrophic loss, and they didn’t get fixed, they stopped paying the mortgage company. Now you’re taking 30-day lates on a mortgage payment. That’s like one of the most devastating credit impacts that you can have is 30-day lates on a mortgage, let alone a foreclosure. So, people in those situations I think need to understand that these loans are personally and individually secured by your credit, and you want to be very careful about what you leave behind when you leave a home.
Ryan Segall: Yeah. I mean, I will tell you that every client I’ve had says. Let’s say I represent the husband and the husband is saying, “Wife can keep the house, I just want, let’s use your example, 40 grand out of it.” 100% of the time I tell the husband that he either needs to make it so that she has to refinance the house to take his name off of it or he can have her sign that deed of trust, a secure assumption. But the problem with that deed of trust is, if he’s going to stay on the mortgage, to your point, he’s going to get dinged if she’s late on the payments. So the DTSA, it allows the, I guess the non-owner anymore to foreclose on the house if they miss a payment essentially. So I tell them those are your options, but here’s the thing. The second that she misses a payment, you’re going to have to call me. It’s not like you just walk down to the bank and say, “Hey, I’ve got this.” It’s a little bit more complicated.
Alejandro Juarez: I mean, Experian, TransUnion and Equifax don’t care what your reason is. They didn’t get paid. They’re like the bookies with the clubs that are going to break your legs. They don’t want to hear about why you were late. You were late, and that’s it. So yeah, that can be really difficult situation to be in.
Ryan Segall: Yeah. And the problem is, if you don’t address the scenario of if someone misses a payment, then you got to go back to the courts and then figure this whole thing out. You can put in your decree, let the wife get the house and the wife is going to make all the payments on the mortgage. But to your point, the bank doesn’t care about your decree. They’re the third party creditors. So they’re going to come in there and they’re going to say, “Both your names are still on the mortgage and we’re going to go after both of you.” And that’s that.
Alejandro Juarez: Personally liable. A lot of people make this assumption in their head where they’re like, “Well, we bought it for together, so we own it 50/50.” It doesn’t work that way. You own it 100/100. And it’s a weird concept because it’s like, “Well, you can’t own anything 100/100.” You do to the credit bureaus. They don’t care whether it’s borrower number one or borrower number two that’s making the payment. They want their payment in full. And if it’s not made, then both of them get dinged at the same level, at the same amount. So people always want to be really, really careful about that.
So what are situations where people can mitigate that risk? I wonder being in a situation where you would say to your spouse, “Hey. You can keep the house. I will continue to make the payments and help you make the payments, but at a certain date, let’s say when the kid gets old enough to go to school. We will then sell the house and then split the prop that’s 50/50 so that we don’t have to worry about selling this house right now. You can stay there and then at 18 we’ll sell the house and split it.” What are situations like that where it seems to me it would make more financial sense sometimes. And of course, there are situations where people need money now, and I get that. But sometimes I feel like with real estate, it’s like if you can find a way to make this work and just deal with this down the road, I almost feel like maybe that makes more sense.
Ryan Segall: Yeah. So I have seen this happen fairly recently, and these two got along well, we went to mediation. Both attorneys are, “You guys should not do this,” but they ended up doing it anyhow, and the kid was older, he’s 16, 17 years old. So, they just wanted to say, “All right. We’re going to get the kid to once he graduates school, then we’ll sell the house.” So your exact scenario, what they did in that case was I represented husband on this one. The wife remained the primary caretaker of the child, and the house was awarded to the husband and the wife was allowed to stay in the house for X date, until a year and a half down the road, whatever it was. So essentially it was like the wife lived in that house for free. So that was the workaround on that one because they were thinking about doing, what you’re saying is just wait and sell the house a few years down the road. You do run into enforcement issues if it’s too far past the dates of the decree signed.
Alejandro Juarez: People don’t do that for extended amounts.
Ryan Segall: That’s why people don’t do it. So what we did was we just said, “Husband’s going to get the house, wife can stay in the house and husband will keep taking the payments and down the road she has to leave the house and then he gets the house.” So there’s a little risk on it.
Alejandro Juarez: Especially in a short term like that, it might actually make some sense. I’m going to throw a wrench in that, which is interesting, in that situation, the husband now has multiple hits to his debt-to-income ratio and a mortgage application. Because he’s paying for a house that he’s not living in and has a separate housing expense for where he currently is and then would be buying another house. So now he has basically the house that he owns and this other mortgage that he’s going to purchase, but no rental income for the house that he owns because his wife’s not paying him rent, he’s just paying that flat out. So those can be obviously complicated situations financially as well.
And I think these are the reasons why when you have creative solutions on the legal side, that you’re able to have conversations with a mortgage lender that you trust to figure out, “Hey, we’re going to do this. This isn’t going to happen for a few months down the road, but what is it going to do to me when I take on the responsibility of paying for this home so that my wife can stay there? What will it do to my chances of being able to go by my own home in the interim?” Because if we do that calculation and tell you, “Hey, there’s no way this is going to work,” then that’s important probably to know. But in some cases it works anyway. So it just depends.
Ryan Segall: Let me ask you this. In that scenario, let’s say we tied into the decree that wife was to pay husband, I don’t know, $1,500 a month, could that help in his debt-to-income ratio?
Alejandro Juarez: Absolutely, because now he can report rental income to the IRS that we would eventually see in his tax returns and help offset the cost of that monthly mortgage payment. Otherwise, it’s basically zero income for that house. Whereas if he would be charging her or had a lease, he would be able to collect that income. Now he can still do the lease. Even today, he could still do the lease. It didn’t have to necessarily be on the decree. I don’t know how the decree is written, but technically he could probably still do the lease. But those are situations where it can get really complicated.
Imagine a sit situation where the husband or the wife, whoever it is gets the house, is paying for the home so that their spouse can stay there with the child, but is also paying child support. Now it’s a triple whammy because you’re paying child support, the housing expense and the expense of you wanting to go buy another house. So now you have these major hits to your debt-to-income ratio because there’s no other income to offset it. Those obviously can be very challenging. You see all kinds of things. But those were the first things that came to mind when we were talking about the scenario. I was just like, “Wow. That’s a lot.”
Ryan Segall: I’m assuming that child support is certainly a debt that lenders consider?
Alejandro Juarez: Absolutely, because we would have to see the divorce decree to find out what the monthly child support debt is going to be. And then obviously the divorce decree would say that the wife is going to stay in the home and the mortgage is still in his name. Now he’s liable for the house without any rental income coming back. So now we have that, the child support, the no rental income, all of the debts that the person currently holds – credit cards, et cetera, plus the projected cost, the monthly cost of the new home.
Ryan Segall: Yeah, I mean it gets tricky.
Alejandro Juarez: It does get really tricky.
Ryan Segall: And to your point of these people working together, but he could be in an uphill battle, so to speak, because he’s doing this good thing.
Alejandro Juarez: No good deed goes unpunished, Segall. No good deed goes unpunished my friends.
Ryan Segall: Ain’t that the truth?
Alejandro Juarez: And the truth is that it’s a very honorable thing and luckily it doesn’t seem like it’s going to be for very long. So I don’t think it’ll be that big of an issue. I was thinking about it more in terms of you got a little tight and you’re like, “Yeah. We’ll sell the house in 18 years. We’ll just let the house increase in value,” but I didn’t know anything about enforcement clause. And that obviously would present a pretty difficult scenario.
Ryan Segall: Yeah. I mean, you just got to get creative sometimes and understand both the risks and rewards of doing so because it could be detrimental to one side. I mean, what usually happens and if you go to court, what usually happens is the court just says, “We’re selling this thing.” And because of all these scenarios that we’ve talked about over the last half hour course, generally just going to say, “All right. Sell the thing because both of you all are on the mortgage.” And that’s the easiest way to avoid special warranty deeds, deed of trusts
Alejandro Juarez: Is this even despite what the people want, even if the people of the spouses don’t want that?
Ryan Segall: If they agree, they can agree and the court will sign off on 99 times out of 100, especially when it comes to property. The court is just going to sign off on what the agreement is. But if people are fighting and one says, “I want the house,” and the other person says, “No, I want the house.” Guess what the court’s going to go? Court’s going to say, “You all are selling the house,” then no one has to worry about mortgages. And unfortunately they don’t get to talk to my friend Alex.
Alejandro Juarez: Yeah. From a purely financial objective standpoint, that is the easiest solution. The problem is that it has all kinds of practical implications on people’s personal lives. Where does the spouse go? Where do the kids go? They’re changing schools now we got to drive 50 miles to drop off the kid because I have to move somewhere else. It creates all kinds of really difficult situations. So I think the key is in finding really great people that are willing to sit down and figure out what those solutions are. And not just in an ideal way, but rather what do these ideal versions of the solution, what are the practical implications of them? What is going to happen when we actually do them?
Ryan Segall: Yeah. Well, I think we’re out of time.
Alejandro Juarez: Yeah, man, that was great. I thought we did pretty good.
Ryan Segall: I can’t believe we’re out of time. I can’t believe it. I have more questions here, but we’ll have to bring you back for part two.
Alejandro Juarez: I’ll be ready, buddy.
Ryan Segall: Maybe our fall real estate series.
Alejandro Juarez: I’m down
Ryan Segall: Even though we’re only in March. Well, that’s all we’ve got for today. If you enjoyed this podcast, please smash that like button, leave a review. And, if you want to contact Alejandro or his team for anything in assistance on mortgage lending, all that jazz. We will have his information listed in the description of this podcast. So Alex, thanks a lot, my friend. I appreciate it.
Alejandro Juarez: Thank you everybody. Thank you for watching. Bye.
For information about the topics covered in today’s episode and more, you can visit our website at waltersgilbreath.com. Thanks for tuning in to today’s episode of For Better, Worse, or Divorce, where we post new episodes every first and third Wednesday. Do you have a topic you want discussed or question for our hosts? Email us at podcast@waltersgilbreath. Thanks for listening. Until next time.