What are the rules for using Child Support and/or Alimony as "Qualifying Income" for a Mortgage Loan Application?
There is often a disparity between "Real Income" (the amount of money we actually receive) and "Qualifying Income" (the amount of income that is recognized on a mortgage loan application). With regards to receipt of Alimony and/or Child Support, this disparity is often accentuated. Below are a few details that need to be known by all Divorcing Homeowners and/or the Professionals who serve them. Divorce Mortgage guidelines are unique.
"The Rule of 6/36" (Part 1)
The first number (6) pertains to "historical receipt of income. The idea behind this emphasis is to determine if the agreed upon payment is actually being made by the Payor in a manner that is consistent with Fannie Mae and/or Freddie Mac (aka "Fannie/Freddie") underwriting guidelines. As Fannie/Freddie create the guidelines that Mortgage Lenders across the country use when originating "Conforming/Conventional" Mortgage Loans, we need to understand the guidelines as they are written...especially as they pertain to divorce mortgage.
To be deemed reliable & consistent income, we must review no less than 6 months of payments received by the Borrower (Payee) from the Ex-Spouse (Payor). These payments must be full, regular and timely in order to be recognized by Fannie/Freddie.
- Payments must come from an Account that the Borrower is not on (otherwise there is no way to determine the true owner of the money being paid out)
- These payments must be easy to document. Ideally through cancelled checks or ACH withdrawals (it is not recommended to use payments by way of cash, barter, Venmo/PayPal).
- Payments must be the consistent amount each month (not partial and/or overpaid). For example, if the agreed upon payment is $2000 per month, please refrain from paying $1800 one month, then $2200 the next month.
- In the above example, let's say the PAYOR covered a $200 "miscellaneous" debt and wanted to deduct the $200 from the $2000 owed. The proper manner in which to conduct the accounting is for the PAYOR to pay the full $2000 owed, then have the PAYEE cut a separate check for the $200 he/she owed to the PAYOR. By doing so, everyone is "made whole" while allowing a consistent audit trail of the $2000 to be documented.
- It is also imperative to make these payments timely. If the written agreement states that payments are to be made by the 5th of each month, it is best to make sure the payments are made/deposited during that time frame each month.
NOTE: There is at least 1 loan program that currently allows historical receipt of income for as little as 3 months (but this is not a Fannie/Freddie loan)
"Document The Agreement"
Mortgage Companies have no way of knowing if the PAYOR is "paying as agreed" without seeing the actual agreement. Examples of suitable written agreements are as follows:
- A copy of the Divorce Decree or Separation Agreement (if the divorce is not final) that indicates the payment of alimony and/or child support and states the amount of the award and the period of time over which it will be received.
- Any other type of written legal agreement or court decree describing the payment terms for the alimony and/or child support (including start/end dates) and ideally be signed/dated/notarized.
- Documentation that verifies any applicable state law that mandates alimony and/or child support (or separate maintenance payments) which must specify the conditions under which the payments must be made.
- NOTE: If a Borrower who is separated does not have a Separation Agreement that specifies alimony and/or child support payments, the Lender would NOT consider any proposed or voluntary payments as qualifying income
"The Rule of 6/36" (Part 2)
The second number above (36) refers to the amount of months of "future receipt of income" will be present. In this case, we need at least 36 months of "continuance" of payments to be made after the date of mortgage application (NOTE: some Lenders require 36 months to be made after the date of mortgage FUNDING, which can impact the approval). As a best practice, use the 36 months from the date of funding whenever possible when attempting to "time" the dates of completing the loan.
An example of the 36 months continuance in action is as follows:
- PAYOR agrees to pay $1500 per month to PAYEE for child support until their daughter turns 18 years old. The Lender will require evidence of age for the daughter to determine when she will turn 18 years old. If her 18th birthday is 32 months away, we lack the required 36 months of continuance, and the $1500 is not considered "qualified income" for the purpose of qualifying for a new mortgage loan)
- It bears noting that we need BOTH the "6" and "36" guidelines to be met (not one or the other)
Mortgage underwriting guidelines can change as quickly as an email titled "effective immediately" can be sent, so please understand that the above information is subject to change. Parts of the above & below guidelines have been copied directly from the Fannie Mae "Selling Guide" to insure proper context.
Certified Divorce Lending Professionals (CDLP's)
Whenever possible, it is advised to work with a Certified Divorce Lending Professional (CDLP) when either/both of the Borrowers are currently going through a divorce, or have previously been through a divorce. For more information about CDLP's please click here. There are specific guidelines pertaining to divorce that mainstream Loan Officers are often unaware of. The lack of awareness to these guidelines is typically the cause of nightmare stories involving divorcing homeowners.
Below is a brief video describing "the 4 Puzzle Pieces of Divorce' delivered by Jason Gordon at The Career Compass Real Estate Seminar in January, 2020.
Although Jason Gordon is a San Diego Divorce Mortgage Specialist, he serves Divorcing Homeowners throughout the state of California and in several other states across the country (and assists all types of Borrowers regardless of their marital status).