Here’s the video to accompany this article > HERE
Preface: I am speaking of Child Support and Spousal Support income in a divorce settlement. Spousal Support maybe called alimony, spousal maintenance, contractual alimony…any number of different terms as determined by state laws or common practice. In mortgage qualifying, it’s pretty much all the same.
There are, obviously, other types of income. For example, in mortgage qualifying there are numerous types of income that appear in a drop-down menu in our loan software. Each type of income has its own rules as to whether it is considered as qualifying income. Here are a few examples:
- Wage-earner income (i.e., paystubs and W-2s). The gross amount is considered as qualifying income. Applicant must have either two years’ experience in the same line of work without serious, recent “gaps” in employment; Or, in lieu of two years’ experience, education for that particular line of work resulting in a diploma, degree or certification.
- Self-employed or contractual labor (1099’s, K-1’s, etc.). Two years in business; the past two years of tax returns document an average income – being the adjusted gross income (after deductions, with some “add-back” exceptions) without significant decline. Year To Date Profit and Loss statements are typically required as well.
- Income from rental properties. Determined sometimes by profit and loss reported on tax returns; also, by lease agreements, security deposits and first month’s rent; and, an appraisal that includes “rental comps” to specify the income-producing capacity of that property.
- Notes receivable (which are not uncommon in divorce). This typically requires documentation of having received payments for 12 months with a continuance of 3 years.
- …and many more
An applicant may have any number of types of income sources. I am dealing with the most common in divorce – Child Support and Spousal Support and what makes that income QUALIFYING or not.
This follows from the first factor – debt/income ratio. We must know both and we must be able to correctly calculate both. But, it’s possible that income – in a divorce settlement – is somewhat malleable. That is, 1) it can vary and 2) it can be structured in such a way so as to either QUALIFY or NOT QUALIFY.
Let me re-state that so that everyone will understand the gravity of the situation.
All income is not equal.
In mortgage qualifying, there is QUALIFYING income.
And, there is NON-QUALIFYING income.
If support is not structured and documented in very prescribed ways, IT IS NOT QUALIFYING INCOME and, effectively, counts as $0 toward the applicant’s income.
There are two numbers to keep in mind when calculating support income.
6 and 36
- Document support income has been received for 6 months.
- Verify support income will continue for 3 years (i.e., 36 months) in a legal document like a divorce decree.
Now, here is the THE MOST IMPORTANT PART of this article.
We have secret, unknown, largely un-practiced tips and tricks to manipulate this timeline to the advantage of your clients, the divorcing homeowner who needs mortgage financing. I have used these tips and tricks – actually based on standard underwriting guidelines – for the better part of two decades to qualify divorced/divorcing homeowners for mortgage loans they would not otherwise obtain.
I cannot tell you these tips and tricks in this article; but if you contact me – or better yet, have your client contact me – I will go over them in general AND outline them in detail for that specific transaction. I teach these in my CLE seminars on Credit & Mortgage Qualifying in Divorce. And, I will give these secrets to any family law attorney who seeks to know how. I actually commit these specifics to print in my customized Assessment/Approval for my divorcing applicants.
To be clear
For the documentation (<key word and secret right there) of 6 months of support income, I show clients how to complete that documentation MONTHS before they otherwise would…without either party paying or receiving a dime extra.
For the continuance for 3 years, there are a couple of important factors that can make-or-break the mortgage loan. Here’s one simple math trick.
Spousal Support – Let’s take an example
If applicant receives $5,000/month for 2 years, how much of that $5,000 is considered “qualifying” income?
Why? Because it does not continue for 36 months.
There are a couple other considerations; but, basically multiply $5,000 times the 24 months ($120,000) and divide by 36 and ask the recipient, can you live on $3,333/month for 3 years instead of $5,000/month for 2 years? In my experience, the recipient believes it is workable – especially if it means they get the financing.
But, from what date is the 36 months measured?
- From the date of final divorce.
- From the date of loan closing.
- From the date that the decree orders payments to be made.
Answer: None of the above.
You have to call or email me for the answer. And, if you were in one of my CLE Seminars this January-February, you may remember the answer.
Part of the answer is – QUITE LITERALLY – make sure the homeowner applies for their loan WITH ME immediately. There, I nearly gave away my secret. Have you figured it out?
Watch the video right here.