Divorce and mortgage financing concerns are often sensitive topics, particularly when one spouse relies on income awarded from the divorce to qualify for mortgage financing. This is especially challenging when contingent liabilities, such as a jointly held mortgage on the marital home, are present.
Understanding how lenders evaluate different income sources awarded in a divorce settlement, as well as handling joint and contingent liabilities, can help you better serve your divorcing clients who are concerned with their ability to qualify for mortgage financing post-decree.
Understanding Mortgage Financing in Divorce Situations
Avoiding hurdles with mortgage financing during a divorce is easier when you understand the potential challenges your clients may face. A basic grasp of how lenders view various income sources can make a significant difference.
Income vs. Qualifying Income
In divorce and mortgage situations, various types of income come into play: Employment Income, Alimony/Maintenance Income, Unallocated Maintenance Income, Child Support Income, Property Settlement Note Income, and more. Although all these are considered "income" by the recipient, not all sources are deemed "Qualifying Income" for mortgage financing purposes.
To be considered "Qualifying Income," certain requirements must be met. For clients needing mortgage financing post-divorce, involving a mortgage professional who specializes in Divorce Mortgage Lending during the divorce process can help avoid common pitfalls when "Income" is not recognized as "Qualifying Income."
Qualifying Income Requirements: Continuance and Stability
Continuance:
A key driver of successful homeownership is the confidence that all income used to qualify the borrower will continue to be received for the foreseeable future. It must be documented that income will continue for at least three years after the mortgage application date. Limitations on the continuance of payments, such as the age of children for whom support is paid or the duration of alimony payments, must be considered.
Stability:
A review of the payment history is required to determine its suitability as stable qualifying income. To be considered stable, full, regular, and timely payments must have been received for six months or longer, provided the income does not represent more than 30% of the total gross income used to qualify for mortgage financing. Income received for less than six months is considered unstable and may not qualify the borrower for the mortgage. Inconsistent or sporadic payments also render the income unacceptable for qualifying purposes.
Example Scenario:
A borrower receives a monthly income of $6,000 from various sources: $2,500 employment income, $1,500 maintenance income, and $2,000 child support. Maintenance income is awarded for three years, and child support is awarded until the children, currently aged 5 and 7, turn 18.
At the time of application, the borrower has been receiving maintenance and child support for six months. The maintenance income is not considered "qualifying income" because it does not meet the three-year continuance requirement.
Working With a Divorce Mortgage Professional Can Make All the Difference
There are many components of income considered in mortgage financing. When divorce-related income is involved, working with a divorce mortgage professional during the divorce process can help attorneys and clients identify and avoid income qualifying issues. Income from other sources, such as property settlement notes or asset distribution income, requires additional layers of stability and continuity.
Always work with a Certified Divorce Lending Professional (CDLP®) when dealing with divorce and real estate or mortgage financing.
This is for informational purposes only and not for the purpose of providing 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. The information contained in this newsletter has been prepared by, or purchased from, an independent third party and is distributed for consumer education purposes.
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
