The overwhelming majority of home purchasers utilize a residential lender in procuring a loan. In most every single family residential mortgage loan product, a recognized source of income, for qualification purposes, is child support/alimony. However, when an ex (or soon to be) spouse is utilizing child support/alimony as a basis for qualification on a mortgage loan application, generally accepted guidelines are considered in order for this money to be included as “income”. Those guidelines have to do with “pattern and duration” of the “income”.
PATTERN AND DURATION
- There should be an establishment of a regular monthly pattern of child support/alimony. Prior to the date of loan application, for a conventional loan, a regular pattern of at least 6 consecutive months of payments must have been established and be verifiable. However, if the loan is not conventional, but is FHA, that pattern must be at least 12 consecutive months. For a VA Loan, it must be at least 3 months.
- There should be a verifiable “predictability” of those payments continuing into the future for a minimum of 36 months after the closing date.
CAVEATS TO THE ABOVE
- Lump sum child support/alimony is NOT considered “income”. Lenders would rather see 48 months of a “predictable” $1500 per month child support/alimony into the future as opposed to a lump sum of $72,000 in the present.
- Child support and alimony are essentially considered synonyms of one another as long as there is that 36 month “predictability”. However, when the oldest child (upon whom the monthly child support amount is based) hits his/her 14th birthday, lenders begin to pay greater attention to the number of months until that child’s 18th birthday, verifiable allocation of child support for each child, etc.
RATIONALE TO THE ABOVE
Residential lenders are very sensitive to what is known as “Ability To Repay” (ATR). It is a new term of art utilized by the recently created Consumer Financial Protection Bureau (CFPB). In short, the CFPB has authority over “everything” related to residential lending. While other factors come into play relative to a mortgage loan approval, a steady “predictable” monthly pattern of income is highly desired by lenders. In short, mortgage payments are typically amortized with a monthly pattern. Therefore, income should follow the same pattern.
As with any purchaser of a home (who plans to use residential mortgage funds for part of the purchase) it is critical for the potential purchaser to have an in depth, “pre-approval” discussion with a reputable residential lender prior to placing a home under agreement. In the case of a potential purchaser who plans to use child support/alimony as a source of income, it is even more critical to have that discussion well BEFORE a final settlement/court order is made relative to economic matters in a divorce, let alone before an attempt is made to put a home under agreement. How child support/income is handled in the settlement/court order can make the difference between loan approval and denial.