Child Support as Qualifying Income for a Mortgage
Qualifying for mortgage financing after a divorce can be difficult. It is important to prepare in advance and structure the settlement to help the party who is seeking to qualify meet the criteria of the underwriters.
Mortgage underwriters are sometimes unable to use child support awarded in the divorce settlement for many reasons. These may include:
§ Duration of the payments remaining is too short (less than 36 months from the loan application)
§ The lack of documentation showing receipt
§ Parents making their own agreements and editing them without a court order
These can hinder refinancing and prevent the party from purchasing or keeping the home.
Documentation of support, proving existence, consistency of receipt, and duration of obligation is critical and typically required by lenders. First, a formal court order should be filed. Problems occur when the parents make there own agreement without a court order and this can dilute the security of the agreement as there is no enforceability from the court if the support obligator ceases making the payments. Legally-binding document is usually required as income verification for any source of funds being used from a divorce.
Bank statements showing consistent deposits of equal child support payments over a certain period of time demonstrate continued, steady, receipt of funds by the applicant. If money is owed by the recipient ex to the payor, it should not be deducted from the amount paid by the payor. Instead, it should be paid back separately in order to demonstrate the continued payment of a particular steady amount in a consistent manner. Most lenders require six months to one year as acceptable verification.
Also, the regularity and timeliness of receipt it important. Any missed or irregular payments may be met with scrutiny from the underwriters and they may discount the reliability of this source of income.
The duration of the child support payment is important as the lenders want to be sure that there is longevity to the continued income stream. Underwriters generally prefer the payments to last for at least 36 months from the date of the loan application. This is important, as most people tend to think it is from the date of the final judgment or from the date during the pendency of the divorce when the child support was first ordered.
Care should be taken to ensure that there are 36 months of remaining court ordered support remaining when filing for the loan application, especially if the child may be nearing the age of emancipation.
When child support is accepted as a source of income and counted as a component of the applicant’s monthly income, it can help qualify for a loan or even a higher loan amount. In expensive cost of living areas such as the Bay Area of California, this is critical to whether a refinancing can occur or any financing accepted.
Commonly referred to as Debt-to-Income Ratio, this measurement is critical to loan qualification. The lenders use this measurement to assess the ability of the applicant to manage the monthly payments and to repay the loan. When the denominator, income, is increased with the inclusion of child support, it enhances the attractiveness of this ratio the applicant’s attractiveness as a candidate for mortgage financing.
Another key factor considered by the underwriters is the applicant’s credit rating. Timely payment of all bills positively impacts their credit score and improves the chance of securing a favorable mortgage.
During the divorce process, parties should start planning for mortgage financing needs of the party who desires to qualify and will need the child support component to do so.
Establishing the child support court order, consistent support payments, and timing in coordination with the application submission are crucial.
This article does NOT constitute legal advice and is for general information purposes ONLY. Prior to making any decisions, seek legal counsel from a licensed attorney.
