Alimony, also known as maintenance or spousal support, is the payment of money by one spouse to the other after separation or divorce. Its purpose is to help the lower-earning spouse cover expenses and maintain the same standard of living after divorce.
Alimony vs. Maintenance vs. Spousal Support: From a general perspective, there is no significant difference between alimony, maintenance, and spousal support. These terms are often used interchangeably to describe payments made to an ex-spouse following a divorce. However, from a mortgage lending perspective, the distinctions can be critical.
Impact on Mortgage Financing: Consider John, who earns a monthly gross salary of $8,000 and pays $2,000 in spousal support each month. When applying for mortgage financing, this $2,000 monthly obligation is usually considered a liability, significantly affecting John's monthly income. However, many agencies (Fannie Mae, Freddie Mac, FHA) may allow this $2,000 in monthly support to be deducted from John's gross income, altering his debt-to-income (DTI) ratio calculation.
- Debt to Income Ratio (DTI):
- If the $2,000 is considered a monthly obligation, John's DTI is already at 25% before accounting for additional consumer debt and housing payments.
- If the $2,000 is deducted from John's gross income, making his adjusted gross income $6,000, he starts with a lower monthly income but a clean slate from a DTI perspective.
Agency Differentiation: Different agencies have specific guidelines regarding alimony, maintenance, and spousal support. Some agencies only allow adjustments to gross income for alimony and require maintenance to be noted and calculated as a liability.
Role of a Certified Divorce Lending Professional (CDLP®): A CDLP® can help identify potential conflicts between the marital settlement agreement and mortgage guidelines during the divorce mortgage planning process. They can offer suggested verbiage that aligns with IRS classifications to alleviate missteps or hurdles for the borrowing spouse.
Benefits of Working with a CDLP®:
- Expertise: CDLPs® bring extensive knowledge of family law, financial and tax planning, real property, and mortgage financing.
- Support: They support and assist the divorce team and divorcing homeowners in achieving smoother and more successful outcomes.
- Planning: Incorporating Divorce Mortgage Planning into the divorce settlement can help both spouses secure new mortgage financing post-divorce.
Get the Divorcing Your Mortgage Homeowner Workbook: Contact a CDLP® today for a copy of the Divorcing Your Mortgage Homeowner Workbook. This guide covers credit, real estate, and mortgage financing after divorce, helping you stay organized and prepared, whether you need to refinance the marital home in an Equity Buy-Out situation or plan to sell and purchase a new home post-divorce.
Conclusion: Divorce Mortgage Planning is a holistic approach to evaluating mortgage options within the overall financial objectives of divorcing situations. A CDLP® helps integrate the mortgage into long-term and short-term financial goals, minimizing taxes, reducing interest expenses, and maximizing cash flow. Involving a Certified Divorce Lending Professional early in the divorce settlement process can set the stage for successful mortgage financing in the future.
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