Set yourself apart from other family law attorneys or financial advisors with these 5 tips on the principles of mortgage qualifying. As a Certified Divorce Lending Professional®, it is my obligation to apply these principles in the context of a specific case where a client is actually qualifying, real-time, for a mortgage transaction. These include refinances to remove a spouse from the mortgage obligation, refinancing to include a buyout to an ex-spouse and purchasing a new home using support as qualifying income.
Of course there is a disclaimer – DO NOT TRY THIS AT HOME. You can describe and discuss these principles in meetings to the benefit of all concerned. But, as in all of mortgage qualifying, your client needs a specific Assessment/Approval with recommendations for the settlement from a mortgage professional. I can certainly help you with that.
1. Structure income as support income wherever possible. In the mortgage world, there is a difference between income and qualifying income. And certain rules of documentation apply. Whereas child or spousal support requires a pay history of 3-6 months, receipt of payments from a “note” or “payout” requires a 12-month pay history.
Example: In a recent case, the agreement was for one spouse to pay $3,000/month in child support and $5,000 in a payout over time for the other spouse’s interest in a company. Mortgage guidelines require a longer pay history for the payout of the “note” (12 months) than they do for child support (3-6 months). So, while the spouse is receiving $8,000 each month, her qualifying income is only $3,000/month (after the required history of payments has been received and documented).
2. Get the clients to begin support payments IMMEDIATELY if at all possible. A pay history must be developed. Doing so benefits both soon-to-be ex-spouses:
- If the wife is keeping the house and the husband is to pay child or spousal support, the sooner a pay history is established, the sooner the house may be refinanced to either remove the husband from the obligation, gain him an equity buy out, or enable him to purchase a new home of his own. Meanwhile, the wife is able to establish her ability to manage the mortgage, bills, etc. on her own.
As the colloquialism goes, “it’s six one and half-dozen the other.” This is more than “gaming the system.” It’s creating a documented paper trail that shows the husband’s ability and willingness to make support payments – a real key in mortgage qualifying. Here’s a sub-tip: Make sure that the payer pays from their sole/separate bank account into the payee’s sole/separate bank account. Payments to or from joint accounts do not count.
3. Remember the 6/36 rule. For conventional loans (aka Fannie Mae or Freddie Mac) a “pay history” of 6 months of support payments must be documented. (Note: For FHA loans, the “pay history” requirement is only 3 months of support payments.) The borrower must have received 6 months of support income in order for that amount to be considered “qualifying income.” In addition, support income must continue for a minimum of 36 months after the loan closing in order to be considered qualifying income. Note that this is after loan closing, not after final divorce. This is critical because when an attorney thinks of “continuance” they are generally thinking of how long some provision may continue after its start date or final divorce. Mortgage guidelines apply to the date on which the loan closes. One more thing – 35 months will not suffice. It must be 36 or more months remaining in the support payment schedule. Yes – it’s that tight.
4. Convert assets to an income stream when there is a potential need for the recipient to qualify (with support income) for a mortgage. In higher net worth divorces, there is often a transfer or division of financial assets to “equalize” the property settlement. While such an agreement may satisfy a logical agreement to split assets, it often leaves the recipient of such large assets without qualifying income and, therefore, without the ability to obtain their own financing. How many times has this happened? Two attorneys, two clients and a couple of ancillary personnel are seated around a large conference room. One attorney says, concerning opposing client, “Well, we’re giving her $300,000, the house is worth at least a $1,000,000 and the mortgage is only $100,000; any bank would be happy to have that loan.” Not so! It will be very difficult for any lending institution to make that loan without the client having their own, separate income from some other source. And even now, there would be no standard (FHA or conventional) mortgage available for that scenario. Why? No income. But, by dividing $300,000 into, let’s say 46 months, the qualifying Income could be about $6,520/month. Now, we have something in the range of qualifying for a real mortgage.
5. Never rely on what you’ve heard “on the street” or what an amateur advises. Always call your Certified Divorce Lending Professional (i.e. me) to verify. Call me, have your client call me, have the other attorney call me – but call. Even armed with the above principles, no tip is as important as involving a professional Divorce-Mortgage Specialist. And the earlier someone calls the better for everyone. Guidelines are in a constant state of flux. Many lenders “layer” their own guidelines on top of FHA/VA/Fannie/Freddie guidelines.
The principles here are subject to change but have remained in their present form for quite a while. If you had to memorize only one of these tips – make it #5. Always call. I’ll help sort it out.
from the Divorce Lending Association LLC