Navigating Mortgage Applications Post-Divorce: How to Leverage Alimony and Child Support

Navigating the financial waters after a divorce can be a challenging feat, with many nuances to grasp. One prevalent assumption among many divorcees is the belief that alimony and child support payments automatically qualify as income when seeking to refinance an existing mortgage or secure a new one. But what if we told you that this isn’t always the case? Shocking, isn’t it? As it turns out, lenders utilize specific criteria to identify what constitutes ‘qualified income.’

The intricate world of mortgage lending views income through a different lens than most of us do. As we delve into this eye-opening discussion, we’ll help you decipher these guidelines, setting you on a course of financial clarity in your post-divorce journey. Buckle up; it’s time to redefine what we understand as income in the mortgage world.

Understanding the Conditions

“Unraveling the enigma of qualified income can be daunting, yet it is critical in the world of mortgage refinancing,” says attorney Samah T. Abukhodeir of The Florida Probate & Family Law Firm. You may ask, “When can alimony and child support be considered as income?” Here’s the golden rule: such payments must be explicitly outlined in a Divorce Decree, Settlement Agreement, or Separation Agreement.

It’s not enough just to receive them; they need legal backing. Furthermore, they must pass what we call the “6/36 rule.” This rule means that you need to show consistent receipt of each payment for at least the preceding six months. More importantly, you need to provide evidence that these payments will continue for a minimum of 36 more months from the date of closing your mortgage.

Navigating the Financial Tides

Separate bank accounts play a pivotal role in this financial dance. The rule of thumb is that alimony and child support payments should move from the payer’s independent bank account into your own separate account. Sounds simple, right? It is, but it’s essential. The waters become murky when funds move from or into joint accounts. From a lender’s perspective, it could appear as if you’re merely paying yourself, and they may hesitate to count these funds as qualified income.

Moreover, documenting these payments is crucial. Whether it’s bank account statements, canceled checks, or deposit slips, these pieces of evidence paint a reliable picture of your income stream, crucial for proving the 6/36 rule and qualifying for that dream home.

The Rigors of the 12/36 Rule

As you continue charting the financial waters of divorce, you may come across a unique income source - Property Settlement Notes. These refer to payments you receive as part of your divorce settlement for your share of business or other property. They can be quite the lifeline when considering a mortgage application. However, like all good things, they come with a set of rules. We call this the “12/36 rule,” which is a bit more stringent than its sibling, the “6/36 rule.”

Under this rule, you must provide evidence of receiving these payments consistently and on time for at least the previous 12 months. Then comes the next hurdle: you need to prove these payments will continue for at least 36 more months from your mortgage closing date. If you thought keeping track of alimony and child support payments was a chore, brace yourself! But don’t fret. A solid record of regular payments can turn these property settlement notes into a potent weapon in your financial arsenal, helping you secure that much-desired mortgage. So, keep those financial records intact and your eyes on the prize.

Embracing the Grossing-Up Advantage

Let’s unveil a well-kept secret in the lending world: “Grossing-up.” Grossing-up is a strategy that converts non-taxable payments, such as alimony and child support, into a higher equivalent taxable amount.

Essentially, it enhances your perceived income in the eyes of potential lenders, painting a more favorable financial picture. The catch? Different loan types–be it conventional, FHA, or VA– allow for varying levels of grossing-up, with each having its nuances.

Here’s where things get interesting: even when grossing-up your income, the stringent 6/36 or 12/36 rules do not relax their grip. These payments still need to have a solid, verifiable track record and must be poised to continue into the foreseeable future. So, while grossing-up can provide a helpful boost, it’s vital not to lose sight of these crucial benchmarks.

The Final Word: Tread Carefully

As our journey comes to an end, remember that alimony, child support, and Property Settlement Note payments are potential income sources–but they don’t come without strings attached. Meeting the criteria for these payments to be recognized as income demands rigorous documentation and careful financial planning. But rest assured, you don’t need to shoulder this burden alone.

Seek out the guidance of a financial advisor or divorce attorney to understand the best approach for your unique circumstances. After all, traversing the choppy financial seas post-divorce is no small feat, and an expert hand on deck can make all the difference.