Getting a home loan may seem like a daunting task if your financial picture includes alimony or child support payments, but it doesn’t have to be. If alimony or child support payments affect your bottom line each month, whether you’re paying or receiving, it’s still possible to qualify for a mortgage.
We’ll show you how these payments impact your qualifying income and what kind of effect they’ll have on your mortgage application. As always, each person’s situation is unique, so get in touch with a mortgage banker to see how these lending requirements apply to you.
How to Use Alimony or Child Support Payments to Qualify for a Mortgage
If you would like to include your child support or alimony payments (sometimes called spousal support) as part of your qualifying income, let your mortgage professional know right from the beginning. There are a few pieces of additional information and documentation that might be required and it’s better to know sooner rather than later if you need to obtain copies of legal proceedings or proof of payments.
There are a few questions that lenders may ask in order to be sure that they can qualify your income:
- Will the income continue for at least three years? If your child is nearing their 18th birthday or your alimony payments will cease, then lenders may not allow the income to be considered. This is to ensure that you’re still able to afford your mortgage payments in the near future.
- Is the income being received consistently? Verifying that payments are being made to you in full and on time is an important part of qualifying this type of income. Providing bank statements or copies of checks you’ve received can help the lender determine that you’re receiving what’s due to you.
- Have legal proceedings taken place, and are they finalized? Typically, you’ll need a copy of the child support agreement, spousal support or alimony agreement, and/or a divorce decree, spelling out all of the terms of the arrangement. If proceedings aren’t finalized, it’s harder for the lender to be sure that the amounts and continuance won’t change.
How Paying Alimony or Child Support Affects Your Mortgage Application
When you’re the one making payments towards alimony or child support, the qualification process is a little different. You’ll still need to provide the relevant court documents, so your lender can verify the details of the arrangement, and you’ll need to be current on your payments. Most lenders won’t view these payments as a deduction from your total income. Instead, they count it as a liability that’s included in your debt to income ratio.
This can be preferable because it doesn’t lower the amount of income that can be considered for your housing expense ratio (known as your front-end ratio), which would lower the amount of the maximum monthly payment – and therefore the max loan amount. It does directly affect your total debt-to-income ratio (known as your back-end ratio) though, and you need to ensure that it isn’t higher than lender guidelines will allow.
Let’s take a look at an example:
If your child support is set at 30% of your income and the lender requires a maximum debt-to-income ratio of 43%, that leaves you with 13% of your gross income for both your mortgage payments and your other debts. If you have relatively few other debts and earn a substantial income, this may not be an issue.
Unfortunately, this requirement can make it difficult to qualify for a home loan, especially in a high cost housing market. It is possible, however, to find a lender who is willing to consider your alimony or child support payments as a deduction rather than a liability.
Everyone’s situation is different when it comes to qualifying for a mortgage. Whether you’re paying alimony or child support or receiving this type of monthly income, it’s smart to talk to a qualified mortgage professional to explore all of your options.
Contact us today and one of our experienced mortgage bankers can help walk you through the possibilities.