New Mortgage Guidelines Squeeze Divorcing Borrowers
Perhaps the headline title doesn’t sound urgent enough. So, how about this?
Fewer Divorced Borrowers Qualify for Home Loans
Good Luck Getting A Mortgage If You’re Divorced
Highlights – ALERT – URGENT ALERT!
- No more 3 months of “pay history” for child or spousal support to qualify for a mortgage
- 6 months minimum and sometimes up to 24 months now required
First, a definition of terms. When getting a mortgage, one must think in terms of qualifyingincome, not merely income.
To illustrate by hyperbole (and a touch of sarcasm), income one receives from robbing convenience stores does not count as qualifying income unless it’s reported for the past 2 years on the thief’s tax returns. “Income from Theft” reports on line 1b under Part I of Schedule C - “Gross receipts or sales not entered on line 1a (see instructions).” Remember to deduct the “split” with your get-away driver on line 11 under Part II (you should issue him/her a 1099 at the end of the year); and fees to your lawyer can be deducted on line 17 under Part II.
The point is, your qualifying income is your “Net Profit/Loss” as reported on line 31 of Schedule C and averaged over the past two years. So you see, you may have had income of $100,000 from your crime spree last year (2011); but the $50,000 you gave to your driver and the $50,000 legal fees to your attorney make your qualifying income a big fat $0. But, you say, I didn’t get caught in 2010 (the previous year) and had no legal fees and I drove my own car so of the $100,000 I “earned” from robbing convenience stores I had no expenses deducted, shouldn’t my average income for two years be . . . let’s do some math here . . . $100,00 + $0 = $100,000 divided by 2 years = $50,000?
Not really. Underwriters see a pattern (forgetting for a moment your criminality) – it’s called “declining income” and, again, you draw a big fat zero.
Think QUALIFYING income. It’s a big deal!
And these are but a few of the many guidelines for qualifyingincome.
Now, what of the divorcing or divorced borrower; specifically for the borrower who is trying to get approved for a mortgage and using child support or some type of spousal support to qualify. What are the rules? What makes that income qualifying income?
Until October 20th of this year, the basic requirements were simple and straightforward. We called it the 3/36 guideline.
“3” - the borrower must have received the support for 3 months (it’s called a “pay history”) and
“36” - the underwriter has to assure its continuance for at least 36 months (easy enough to verify in a divorce decree since it specifies exactly how long support will continue). By the way, 35 months will not do – not a month less than 36 months after closing (not merely after final divorce).
Interestingly, we routinely helped divorcing borrowers develop a 3-month pay history relatively quickly. For instance, here we are at the end of November. I get a call and the applicant-client needs to qualify for a mortgage that must close at the end of December. How can we develop a 3-month history in 30 days? Very simply, the client is to receive the first support payment before the end of November for November’s support, then again on December 10th(or thereabouts) for December’s support and for the third time on December 15th for an early January support – *Merry Christmas! Really in about 18 days, we have created a legitimate 3-month history of support payments. Other guidelines apply. For example, it’s important which account pays the support and which account deposits it. (See me for those guidelines).
This is now a thing of the past. No longer does a 3-month pay history work. Lenders now require a minimum of 6 months of support payments received and can require as much as 24 months. Following the most aggressive pay history strategy (preceding paragraph), it will now take a minimum of about 4 months to develop this 6-month pay history. Just follow the calendar in the above example and you will see that at the end of March, the borrower might receive an early April payment to complete the 6 month history.
2nd payment December 1
3rd payment January 1
4th payment February 1
5th payment March 1
6th payment March 15th for April’s payment
*This does not always work but we haveclosed many transactions qualifying on this pattern of support income. In other words, it can work.
Winning Strategies for Family Law Attorneys and Divorcing Clients
In light of these momentous guideline changes, I am recommending the following strategies for divorcing mortgage applicants:
1. Speak with me as early as possible. No more of this “here’s Noel’s card, he can help so you should call him” stuff. Clients need to hear something more like “Let’s get Noel on the phone right now” or “Go into my conference room after our appointment and dial up Noel immediately – you have to speak with him NOW.” Of course this is a shameless attempt to increase my business. But, it’s really a lot more than that. If your clients do not get started immediately, they may well lose the ability to obtain any mortgage financing or their spouses may be unable to qualify for financing thereby leaving them at risk.
2. Unless you see reasons why not, both parties should immediately open their own checking accounts. At the very least, the recipient should open his/her own sole/separate bank account. This is critical for verifying that the applicant has indeed received the funds for himself or herself.
3. The potential borrower and recipient of support payments should begin receiving support payments, albeit informally, immediately. (Document according to my customized and specific instructions).
4. Potential borrower and recipient of support payments should begin paying the mortgage from his/her own account. If wife is going to be awarded the house and must refinance its mortgage and husband has been paying the mortgage, the two parties should arrange between the two of them for husband to pay wife support payments and wife should then pay the mortgage.
a. This flow of funds (previous two paragraphs) accomplishes at least two very important qualifying features in a mortgage loan.
i. First, it establishes support payments paid and received.
ii. Secondly, the potential borrower begins to develop proof that she is making payments and thus, demonstrating that she has “the ability to afford the house payments.” I didn’t mention it but one of the new guidelines allows reduced documentation of support (from as much as 24 months down to only 6 months) only if the borrower demonstrates their ability to make the payments.
5. The amount of support should equal or exceed the minimum expectations of support. Child support is fairly straightforward in terms of minimal amounts, as I understand it. Spousal support, negotiable as it may be, is another matter. In all cases, the borrower qualifies – there’s that word again – on the lower of the decree’s ordered amount or the actual pay history amount. The decree may order $2,500/month but if payments have only been $2,000/month then only the $2,000 can be used to calculate debt/income ratios, not the $2,500. Conversely, if payments have been $2,500 and only $2,000 is ordered, then the borrower qualifies on the $2,000. But, ‘tis better to develop a pay history that is inflated above the final amount awarded than to develop a pay history that is less than the final amount awarded.
LET ME DEVELOP THE APPROVAL AND OUTLINE A PRECISE STRATEGY FOR A DIVORCING BORROWER TO QUALIFY FOR THEIR OWN MORTGAGE
The next boom to fall . . . support income measured as a too small of a percentage against total income may no longer be qualifying. Stay tuned.