Mortgage Loans & Divorce – What Every Woman Needs to Know
Divorce can be devastating. Everything changes. A new living arrangement is one of the first decisions that needs to be made. Buy? Rent? Stay in the home or downsize?
I was at a networking lunch and met Joanne Rogers, Vice President of Mortgage Lending at Guaranteed Rate. I invited her to answer some of the top questions she gets when she meets with women who are going through a divorce.
Do alimony and child support count as income?
When you apply for a home loan, you’re required to certify your income, offer proof of employment and show that you’re a good credit risk. Many people are not sure what to write down when it comes to reporting child support payments, alimony, and other income as a result of a separation or divorce.
How do you include income from alimony payments and additional financial support in your loan application? More importantly, how does your lender regard such payments?
The first step in getting lenders to recognize this as a legitimate source of income. Do this by showing proof that such payments are happening on a regular basis. Many couples who enter divorce proceedings agree to informal child support arrangements or alimony payments. Unfortunately, the lender is not obligated to recognize such arrangements.
In fact, for alimony or other payments to be considered as income, there must be a court order or other legal documentation showing that one party is legally obliged to pay the other party.
A signed and recorded Divorce Decree, Separation Agreement or Court Order is sufficient in most cases, as they state the following:
- The party paying alimony or child support must be obligated in writing to pay.
- The payer must be obligated to continue paying for a minimum of three years after the loan closing.
Additionally, there must be evidence of complete, on-time payments for at least 6 months (FHA requires 12 months when alimony or child support is greater than 30% of total income).
If payments are made on an inconsistent or sporadic basis, the income is not acceptable to qualify the borrower.
How do my alimony and child support payments affect debt-to-income ratios?
Payments must be considered as part of the borrower’s recurring monthly debt obligation when the borrower is required to pay alimony or child support under a divorce decree, separation agreement, or any other written court order (and payments must continue for 10 or more months).
Voluntary payments do not need to be taken into consideration.
The lender has the option to reduce the qualifying income by the amount of the court-ordered obligation (Fannie Mae Conventional allows this, and often is necessary to reduce debt to income ratios) in lieu of counting as a monthly liability.
Payments that are treated as a reduction in income must be noted as an adjustment to income on tax returns/transcripts.
What is the best way to document complete, on-time payments?
Schedule automatic direct deposits from payer’s bank account for the exact amount and due dates per the court order. Cash is unacceptable as there is no way to document receipt. Income must be provided on Federal tax returns and confirmed on lender-obtained IRS tax transcripts.
My child is 16 years old. Can their child support be counted as income?
If your child will be considered a legal adult at 18 and there is no proof of at least 3 years of a continuance of child support, then it cannot be counted as income.
Navigating divorce is difficult even in the best of circumstances. Make sure you get the facts and protect yourself financially for the next chapter of your life.
Taking a thing apart is always faster than putting something together. This is true of everything except marriage. ― Joe Hill
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