Alimony and child support can affect mortgage qualifying in either a positive or negative way, since lenders may treat them as income or count them as liabilities. How these payments are structured could affect your ability to refinance as required by the marital settlement agreement and impact your ability to qualify for a purchase and move to another property as required by your final divorce decree.
Understanding this dynamic is critical for divorce mortgage planning and in today’s post I will explain how alimony and child support impact the mortgage qualifying process.
Alimony and child support payments are often part of a divorce settlement. These payments can directly impact a borrower’s ability to qualify for a mortgage. Lenders assess a borrower’s debt-to-income (DTI) ratio, which compares monthly debt obligations to gross income.
DTI is calculated by dividing monthly liabilities by total gross monthly income used for qualifying, with a lower DTI being better. Alimony and child support can either help or hurt loan qualifying because they can either count as income or be treated as a liability and increase your DTI ratio. Also, remember that non-taxable income may also be “grossed up” which is a formula that increases a borrower’s qualifying income.
The “6/36 rule” refers to the guideline lenders use to determine if alimony or child support payments can be considered qualifying income for a mortgage. According to this rule, the recipient must have consistently received the support payments for at least the past 6 months and must be expected to continue receiving them for at least the next 36 months. This ensures the income is stable and reliable for loan qualification purposes.
While a lump sum payment may provide the recipient with immediate financial security and a clear end to the obligation by the payor, it lacks the continuance needed to be used as qualifying income. In contrast, periodic alimony payments that meet the 6/36 rule stated above provides stable income that can be used towards loan qualifying.
Properly structured agreements help ensure these payments work within the 6/36 rule so they count towards qualifying income. This can be crucial for the divorcing homeowner to qualify for a refinance or for the departing spouse to obtain a new mortgage.
Understanding the interplay between alimony, child support, and mortgage qualification is essential for successfully navigating housing decisions after divorce. Properly structuring these payments can significantly impact your financial flexibility, determining whether you qualify for refinancing or purchasing a new home. Working closely with a Certified Divorce Lending Professional (CDLP®) can ensure your marital settlement agreement aligns with mortgage guidelines, positioning you for financial stability in your post-divorce life.
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SeanS@MPLX.org
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