“Hi Noel,” writes one of the most awesome family attorneys in Texas, “do you have a quick email or blog you could point me to that I could show my client re: the general structure of how child support and alimony would factor into giving a non-monied spouse the ability to refinance a home?”
Well, I don’t have a blog that discusses just this – so, I’m going to write one. ?
See if this helps for now. Let me know.
How to Structure Income in Temporary Orders and Final Settlements
This section is intended to explain the general guidelines under which mortgage loans are underwritten and approved. However, the mere application of these guidelines in a divorce settlement does not secure loan approval. They must be instituted in conjunction with an assessment (with recommendations) if they are to be useful in securing loan approval. Simply use the services of a competent Divorce-Mortgage Specialist. < This is the important part – client should call me ASAP. Then, it’s custom-made recommendations. ?
A. Underwriting guidelines for income
- In general, mortgage guidelines for income look back 2 years and forward 3 years.
- 2-year work history is required. (In lieu of 2 years of work history, two situations can be substituted - education and marriage/divorce.)
B. Structuring Child Support and Spousal Support
- Income history: 3 or 6 or 12 months (depending on program and “findings” – the automated approvals that Fannie, Freddie provide).
- Income projection: Must continue for 3 years. There is a little-known guideline that allows for the 3 years to start from time of application. I would not count on it. But, this means that borrowers need to call me and do the application as soon as possible. The application date becomes the starting date for that 3 years. If, for example, the oldest child is about to graduate from 9th grade and/or will turn 15 in a couple of months, the borrower should apply immediately because by the time they receive (and document) 6 months of support, their oldest child’s support will continue for less than 3 years and thus become a non-qualifying amount if the application is dated after that child’s 15th birthday or graduation from 9th grade (generally speaking). [Of course, the parties could agree that the support will extend beyond the typical emancipation dates. Again, I wouldn’t count on it.]
C. Documenting support income for mortgage qualifying purposes
- The principle of documentation
- Use the 3rd grade principle – make the documentation of it so simple that a 3rd grader could underwrite the file.
- Don’t add to or subtract from the deposit.
- Don’t substitute a support payment with paying another bill and reducing that amount from the support. “Well, he just paid the mortgage this month so he didn’t give me the support…” too bad – you have to start over building that 6-month pay history!
- Play the devil’s advocate and assume that everyone suspects the actual flow of funds. Make it so clear that there is no question as to who is paying whom how much and by what regularity.
- The “separate accounts” principle
- Show the funds move from the payer’s own separate account
- Show the funds move into the payee’s own separate account
- When funds move between joint accounts, it becomes problematic. There are some work-arounds like if the payer’s account is joint, make sure that account is awarded to the payer in the final decree and that the payer is using that account as his/her own rather than truly as a joint account into which, for example, the payee is depositing his/her paycheck, etc.
- How to document 3 months of income in 25 days. August 30 – Payment #1 (for August payment); Sept 15 – Payment #2 (for Sept payment); September 25 – Payment #3 (for October payment, early).
Well, that’s real nice back when we only needed a 3-month pay history. Unfortunately, the underwriting engines are requiring 6 months in general and FHA requires 12 in many cases.
Keep in mind that support can be paid on any day of the month and that payment can count as support for that month in which it is paid. This is counterintuitive to the general practice in the legal world wherein payments are generally set to be made on the 1st, 15th or both, every 2 weeks, garnished, paid via the OAG Child Support Office, etc. The rules for documentation and mortgage-qualifying for support income are different from legally prescribed payment schedules.
Does this help? I really appreciate you. You’re the best of the best!
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Here's to helping divorcing folks. Thanks for reading.