In a divorce settlement agreement, being mindful of word choice is crucial to avoid language traps and future conflict. The terminology used can significantly impact a divorcing client’s ability to obtain mortgage financing. While it may not be top of mind to align the wording with mortgage guidelines, clarifying certain terms in the settlement agreement can greatly benefit divorcing clients.
Ensure Your Words Are Clear and Accurate
The terms “alimony,” “maintenance,” and “spousal support” are often used interchangeably to describe payments made by one spouse to another post-divorce. However, these terms may have different implications for mortgage underwriters.
Example: From a liability/debt perspective, FHA guidelines differentiate between alimony and maintenance, while other agencies do not. If your divorcing client is paying 'maintenance' and needs mortgage financing, clarify that alimony and maintenance are considered the same. Including a statement like:
“All maintenance payments paid by Husband to Wife pursuant to this agreement are intended to constitute alimony.”
can help avoid terminology issues.
Adhering to Strict Mortgage Guidelines in Divorce Settlement Agreements
Equalization payments as income can be contentious for mortgage approval. Often, a divorcing client prefers to classify what would typically be considered maintenance as an equalization payment to mitigate income taxes. However, since a property equalization payment is meant to balance the final division of property, it may be viewed as income from a property settlement note during mortgage underwriting. Strict mortgage guidelines require documentation of 12 months' receipt of the equalization payment for it to qualify as income.
To prevent equalization payments from being considered property settlement notes, detail the payment schedule in the divorce settlement agreement and stretch payments over a three-year period to meet the ‘continuance’ requirement for qualified income.
Consult a Certified Divorce Lending Professional (CDLP®) for Assistance
Work with a Certified Divorce Lending Professional (CDLP®) to ensure there are no language traps between the intent of the divorce settlement agreement and mortgage guidelines. It’s easier to get it right the first time than risk mortgage denial due to word choices or lack of clarification. Find a CDLP® in your area for expert guidance.
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.
Always work with a Certified Divorce Lending Professional (CDLP®) when going through a divorce and real estate or mortgage financing is present.
Copyright 2020 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
