Alimony, Spousal Support, Maintenance, Child Support, and other support payments ordered through divorce proceedings come in different shapes, sizes, and creative solutions. The divorce team may have successfully structured support orders that satisfy both parties; however, how the paying spouse makes the payments after the fact may negatively affect the receiving spouse's ability to obtain mortgage financing.
Three common issues that may disqualify support income when applying for mortgage financing:
- Meeting the consistency and stability tests for mortgage financing.
- Not paying support directly to the receiving spouse.
- Reconciling support payments with outstanding debts and other agreements.
Meeting the consistency and stability tests for mortgage financing.
The basic rule for using support income as qualified income for mortgage financing purposes is the 6/36 rule. For spousal or child support to be qualified income, we typically need to show six months' proof of receipt and 36 months' continuance AFTER the loan has closed. (Note: When using a government loan, typically only three months' receipt is required.) The problem becomes when spousal support is ordered paid for only three years. By the time there are six months' payment receipts, there is no longer a three-year continuance, and the income becomes disqualified.
Another hurdle with support income other than meeting the 6/36 rule is documentation and receipt guidelines. Two specific criteria must be met to use support income in addition to the 6/36 rule. For support income to be qualified income, it has to meet standards for consistency and stability. Meaning support must be paid as ordered. If the order says Spouse A must pay $1,000 in spousal support to Spouse B by the 5th of every month, and Spouse A pays the $1,000 in various amounts throughout the month, there will be an issue using the support.
And, of course, the payment received must not be inconsistent. So, for example, spousal or child support as qualified income must be paid in full as ordered and on time as ordered. Meaning that if the paying spouse pays $700 one month and $1,100 the following month and maybe pays on the 5th of one month and then on the 20th the next month – it isn't paid as ordered and will not qualify as qualified income.
For example, consistency and stability may become an issue when support is based on the paying spouse's fluctuating income. Proper expectations need to be established to avoid the disqualification of such payment. It is crucial to involve a Certified Divorce Lending Professional (CDLP™) during the divorce mortgage planning process to avoid this common mistake.
Not paying support directly to the receiving spouse.
Oftentimes, a former spouse is concerned about transferring money from their personal account to the receiving spouse's account. So they agree to transfer the funds to a joint account, and then the receiving spouse moves the money out from there. In this case, the income is not useable because you can't pay yourself support. And effectively, that's what's happening here.
Whether intentional or not, both spouses must understand the implications of how support is paid and received and the potential adverse effects it may have on obtaining mortgage financing.
Reconciling support payments with outstanding debts and other agreements.
Another cause for concern is when one spouse is required to pay monthly support; however, both spouses are responsible for certain expenses, such as child medical expenses. The spouses may agree to reconcile the ordered support payment with the shared costs. Thus, effectively netting out support payments.
For example, during temporary orders, the husband was ordered to pay the wife $9,500 in monthly support. However, out of that $9,500, he was to pay the mortgage, utilities, and medical expenses directly and then pay her the remainder in cash form. In addition, the wife was to refinance the existing mortgage within a specific time frame once the divorce was final. Unfortunately, the income received may be disqualified because it is neither consistent nor stable. Suppose you ever are in this situation with one of your cases. In that case, it's cleaner and easier to pay the total support amount ordered and have the receiving spouse pay the bills directly – from a mortgage financing perspective anyway.
Since 2014, Certified Divorce Lending Professionals (CDLP™) with the Divorce Lending Association have been helping divorcing homeowners make more informed decisions regarding their home equity solutions. Divorce Mortgage Planning is a holistic approach to evaluating mortgage options in the overall financial objectives related to divorce situations.
Incorporating divorce mortgage planning into the settlement process makes it easier to identify possible solutions and assists both parties in letting go of counterproductive positions and emotions. In addition, a CDLP™ can assist in taking stock of possibilities, resources, and answers regarding the marital home, other real property, and mortgage financing opportunities.
A successful divorce settlement results from effective communication and strategic negotiations in such a manner that both divorcing parties come out whole or at least on the road to recovery. Working together as a team and incorporating divorce mortgage planning into the settlement cycle with a Certified Divorce Lending Professional will ultimately result in a better solution and better outcome for the divorcing couple.
Divorce Mortgage Planning is a holistic approach to evaluating mortgage options in the context of the overall financial objectives as they relate to divorcing situations. Working directly with the divorce team, a CDLP™ understands the intersection of divorce and family law, financial and tax planning, real property, and mortgage financing. The role of the CDLP™ is to help integrate the mortgage selected into the overall long and short-term financial and investment goals to help minimize taxes, minimize interest expense, and maximize cash flow.
Involving a Certified Divorce Lending Professional (CDLP™) early in the divorce settlement process can help the divorcing homeowners set the stage for successful mortgage financing in the future.
This is for informational purposes only and not to provide legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
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