If you are divorced or are going through a divorce, you might assume that receiving alimony and/or child support payments will qualify as income to refinance your current mortgage or get a new one.
Unfortunately, you may discover that is not necessarily true. What you and others might consider income and what mortgage lenders consider qualified income may be two very different things.
Qualified Income for a New Mortgage or Refinancing
In general, the alimony and/or child support you are or will be receiving will only qualify as income if:
1 – It is subject to (and clearly spelled out in ) a Divorce Decree, Divorce Settlement Agreement or Separation Agreement and, in general,
2 – It passes the “6/36 rule.” You must be able to prove you have consistently received each payment separately for at least the previous 6 months and that you will continue to receive each for at least 36 more months (3 years) from the date of the closing (in some cases, it might be from the date of application, but to be conservative, assume from date of closing). Please note, this rule applies separately to the alimony payments and the child support payments.
To prove the 6/36 rule, you will have to show that payments were consistently received on time for the previous 6 consecutive months using bank account statements, canceled checks, deposit slips, or some other proof of receipt.
Documenting support income for mortgage qualifying purposes
1 – The documentation to prove the 6-months receipt of alimony and/or child support should start as early in the divorce process as possible. (You might not be able to get this temporary support if you and your spouse are still living in the same home. Please discuss this with your divorce attorney.)
The payor should not substitute a support payment by paying another bill and subtracting that amount from the agreed upon support payment. For example, the payor paid the mortgage payment due this month instead of making the agreed upon alimony payment. That will cause the 6-month payment history to restart!
Both alimony and child support payments must be made each month consistently and on-time. To avoid confusion, we recommend that any divorce agreements stipulate that payments will be made with two separate checks each month, one for alimony and one for child support . It can also make the process of grossing-up much easier and cleaner (see the section below on Grossing-Up).
2 – The importance of separate bank accounts for each party:
The funds for the payment of alimony and/or child support must move from the payor’s own separate bank account into the recipient’s own separate bank account.
This is very important!
When funds move from or into joint accounts, it becomes problematic and may result in the mortgage lender not considering those funds to be qualified income, because it might appear to lenders that you are paying yourself.
You will also be required to provide:
- Divorce Decree, Divorce Settlement, or Agreement that stipulates the amount and duration of Alimony and/or Child Support,
- Evidence of your children’s ages (birth certificates) to show that they will be young enough for you to continue to receive Child Support for at least 3 more years (36 months) after closing. (The age of emancipation – when child support is no longer required to be paid – is typically 18 or 21 in most states.)
If you are also receiving payments as part of your divorce under a Property Settlement Note (which could be for your share of a business or other property), you must show evidence, as I described above, that you have received the payments consistently and on time for at least the previous 12 months and that you will continue to receive those payments for at least 36 more months from the date of the closing. You could call this the “12/36 rule” for Property Settlement Note payments.
What is Grossing-Up?
Grossing-up sounds like something disgusting, but I assure you, it will be very beneficial for you!
Here’s what you need to know:
- Child support payments are not taxable income to the recipient or tax-deductible to the payor.
- Alimony payments pursuant to a divorce finalized on or after January 1, 2019, are also not taxable income to the recipient or tax-deductible to the payor. (Alimony payments for divorces finalized prior to January 1, 2019, are taxable income to the recipient and tax-deductible to the payor unless the Divorce Settlement Agreement states otherwise.)
- Property Settlement Note payments are also not taxable income to the recipient. However, any interest being paid on the note is considered taxable income to the recipient and therefore is tax-deductible to the payor. (FYI, if a Property Settlement Note is going to be used as qualified income, it follows a more stringent requirement than child support or alimony. You must demonstrate you have received consistent and on-time payments for the previous 12 months and those payments will continue for another 36 months).
So, what exactly does grossing-up mean?
In essence, grossing-up converts non-taxable income into the higher amount it would have been if it was taxable income. We do this because lenders consider your gross income (income before taxes) when determining your eligibility for a mortgage.
For mortgage purposes, you can typically gross-up Child Support, non-taxable Alimony, and Property Settlement Note payments by 25% for conventional loans (Fannie Mae and Freddie Mac) and VA loans and by 15% for FHA loans (other non-taxable income such as disability payments can also be grossed-up).
For example, $1000/month in child support becomes $1250/month for a conventional mortgage, but only $1150/month for an FHA mortgage.
Those higher income amounts can help you better qualify for the mortgage or refinancing you’re looking for, but remember the 6/36 rule I previously wrote about and the 12/36 rule for Property Settlement Notes I mentioned earlier in this article still apply.
NOTE: You may have other qualifying income, such as from a job. If that income is large enough, you may not need to use, or even disclose, any alimony and/or child support payments you are receiving.
For information about my forthcoming book, Divorce House Sense: Can You Keep Your Marital Home or Will You Have To Sell? Please visit https://