Strategic Mortgage Planning During Divorce: the Critical Role of Child Support as Qualifying Income
With many years of experience in lending, I have frequently observed clients struggling to qualify for a new mortgage in their post-divorce lives. This difficulty often arises when mortgage underwriters are unable to use the child support awarded in the divorce settlement due to the duration of payments remaining, or the lack of documentation showing receipt, or parents making their own agreements without a court order. These can hinder refinancing an ex-spouse off the loan or prevent the purchase of a new home. It is important to understand what lenders typically require when using child support as income to qualify. When dealing with mortgage financing after divorce, issues related to child support can significantly impact the process. Here are some key points to understand and consider before accepting a final settlement proposal:
Proof, Duration & Consistency of Child Support
The Documentation
Lenders typically require documentation proving the existence and consistent receipt of child support payments. This can include a court order or separation agreement detailing the child support arrangement along with bank statements showing consistent deposits of child support payments over a certain period. Typically six months to a year is required as acceptable verification. Problems can occur when parents make their own agreement without a court order. Lenders may feel like the arrangement is less secure and without enforceability from the court should the paying spouse cease making payments. Most often, legal-binding documentation is required as income verification for funds being used from a divorce.
Duration of Child Support
When considering future payments, lenders also consider how long the child support will continue. Underwriters generally prefer the payments to last for at least 36 months from the date of the loan application. If any child is nearing the age of emancipation or if child support end is ending sooner than three years it could affect that income eligibility.
The Consistency
Regular and timely receipt of child support is crucial. Any missed or irregular payments might raise concerns for lenders about the reliability of this income source.
Impact of Child Support on Mortgage Financing
Income Consideration
When child support can be counted as part of one’s monthly income, it can help qualify for a higher loan amount. However, the consistency and duration of the payments are critical factors which may determine if an underwriter can use that income for qualifying purposes.
Debt-to-Income Ratio
Commonly referred to as DTI. Lenders use DTI to assess the ability to manage monthly payments and repay the loan. Being able to include child support payments as part of regular monthly income can improve the DTI ratio, making a person more attractive as a candidate for mortgage financing.
Some Tips for Smooth Financing
Organize Documentation
Have all relevant documents well-organized and readily available. This includes court orders, bank statements showing evidence of receipt, and any correspondence related to child support.
Work with an Originating Professional
Consider consulting with a financial advisor or a mortgage broker who specializes in post-divorce financing. These professionals can guide parties through the process and help present the financial situation to a lender in the best possible light. The Divorce Lending Association can refer you to a professional in your area.
Maintain Good Credit
Ensure credit score remains in good shape. Timely payment of all bills, including child support payments, positively impacts credit scores and improves the chances of securing a favorable mortgage.
Plan Ahead
If possible, start planning for mortgage financing during the divorce process, well in advance of a possible refinance or intended new purchase. This provides enough time to gather necessary documentation, ensure consistent child support payments, and address any potential issues that may arise.
Engaging a CDFA professional ensures that parties have expert guidance in navigating the complexities of divorce settlement, child support and mortgage financing knowledge. This comprehensive approach helps balance a client’s immediate financial needs, sets a strong foundation for future mortgage financing and long-term financial stability, and helps parties confidently move forward.
