Divorce and mortgage financing concerns are often a touchy subject. Particularly when one spouse is dependent upon income awarded from the divorce for mortgage qualifying purposes, and also when contingent liabilities are present; such as a jointly held mortgage on the marital home.
Having a basic understanding of how lenders look at the different sources of income awarded in a divorce settlement, as well as how joint and contingent liabilities are handled can help better serve divorcing clients.
Income vs. Qualifying Income
Often times in a divorce and mortgage situation there are various types of income to consider: Employment Income; alimony/maintenance income; unallocated maintenance income; child support income; property settlement note income; and more. Although all sources of income are considered “income” by the recipient (although not all are taxable), it is important to understand that from a mortgage financing perspective, not all sources of income are considered “qualifying income.”
In order to be considered as “qualifying income” certain requirements of each income source must be met. For divorcing clients who will need mortgage financing once the divorce is final, involving a mortgage professional who specializes in divorce mortgage lending during the divorce process rather than post decree can potentially help avoid common pitfalls when “income” is not considered “qualifying.”
Alimony/maintenance, whether unallocated or allocated, (along with child support) must meet both continuance and stability tests to be considered “qualifying” for mortgage financing purposes.
Continuance: A key driver of successful homeownership is confidence that all income used in qualifying the borrower will continue to be received by the borrower for the foreseeable future. Borrowers must be able to document that income will continue to be paid for at least three years AFTER the date of the mortgage application.
Stability: A review of the payment history is required to determine its suitability as a stable qualifying income. To be considered stable income, 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 be used to qualify the borrower for the mortgage. In addition, if full or partial payments are made on an inconsistent or sporadic basis, the income is not acceptable for the purpose of qualifying the borrower.
As an example: A borrower receives a monthly income of $6,000 from varying sources: $2,500 employment income; $1,500 maintenance income; $2,000 child support. Maintenance income is awarded for 3 years and child support is awarded until each of two children turn 18 (currently ages 5 and 7.) The borrower has been receiving both maintenance and child support for 6 months at the time of application.
The maintenance income is not considered as “qualifying income” because it does not meet the continuance requirement of 3 years.
There are many components of income considered in mortgage financing. When income from a divorce situation also comes into play, working with a divorce mortgage professional during the divorce process rather than post decree can help clients identify and possibly avoid income qualifying issues for mortgage financing.
When the situation also involves income from other sources such as property settlement notes, asset distribution income, etc. there are additional layers of stability and continuity required.
Temporary Orders and the Time Clock
When temporary orders for alimony/maintenance and/or child support are awarded, the time frame for meeting the receipt requirements begins upon the receipt of the first payment. When permanent orders are given, the qualifying income dollar amount used for mortgage financing purposes will be the amount in the final settlement agreement. Typically one month’s receipt of final support order is required.
When mortgage financing will be a time-sensitive issue upon the final settlement agreement, issuing temporary orders can be a benefit. Temporary Orders can jump-start the clock on the receipt of 3 or 6 months and be a benefit in speeding up the time frame of obtaining mortgage financing.