It's crucial to be mindful of the wording used in a divorce settlement agreement to avoid potential conflicts and issues. The language used can also significantly affect the divorcing homeowner’s ability to obtain mortgage financing. While it may not be top of mind to phrase the divorce settlement agreement to meet mortgage guidelines, doing so can substantially benefit divorcing homeowners. Clarifying specific terminology used in the settlement agreement is essential.
Ensure Your Words Mean What You Intend
Terms like “alimony,” “maintenance,” and “spousal support” are often used interchangeably to describe payments made by one spouse to another after a divorce. Although these terms might have the same meaning, they may be interpreted differently by an underwriter.
For instance, some agency guidelines differentiate between alimony and maintenance from a liability/debt perspective, while others do not.
If your divorcing client is paying ‘maintenance’ and needs to obtain mortgage financing, you can help them avoid terminology issues by clarifying that alimony and maintenance are considered the same. It could be beneficial to include a clarifying statement such as:
“All maintenance payments paid by Husband to Wife according to this agreement are intended to constitute alimony.”
Does It Really Make a Difference?
Consider this example:
Joe is ordered to pay Jane 30% of his gross monthly income as spousal maintenance. Joe wants to purchase a new home, but the monthly maintenance may negatively affect his buying power.
Words Matter!
| Joe's Gross Monthly Income | Adjustment for Maintenance | $10,000 | $10,000 |
|---|---|---|---|
| Joe's Gross Monthly Income | $10,000 | $7,000 | |
| Debt Load: | |||
| Monthly Maintenance | $850 | $3,000 | $850 |
| Debt-To-Income (DTI) Ratio | Before Housing | 39% | 12% |
| Max DTI of 45% - amount available for new housing expense | $650 | $2,300 |
In certain situations, Joe's maintenance payment could be deducted from his gross income rather than classified as a debt or monthly obligation. The above table illustrates the positive effect of adjusting the monthly maintenance obligation, increasing Joe's purchase opportunity from a housing payment of $650 per month to $2,300. However, specific lending agencies will only allow this adjustment for alimony. If the clarification statement above is overlooked, it may limit Joe's ability to obtain mortgage financing.
Divorce Mortgage Planning: A Critical Step for Homeowners
Divorce Mortgage Planning can significantly impact a divorcing homeowner's mortgage opportunities. Working with a Certified Divorce Lending Professional (CDLP®) ensures there are no language traps between the intent of the divorce settlement agreement and mortgage guidelines. It is much easier to get it right the first time than risk mortgage denial due to word choices or lack of clarification.
Contact a CDLP® for Assistance
Work with a Certified Divorce Lending Professional (CDLP®) to ensure the divorce settlement agreement aligns with mortgage guidelines. Find a CDLP® in your area to help you navigate this complex process.
Copyright 2022 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.
