After a divorce, many people find themselves looking for a new home. In order to make sure you qualify to purchase a home after your divorce is finalized, it is important to keep your “home buying goal” in mind during settlement discussions or negotiations.
Creative settlement structuring could help a person qualify to purchase a new home. And, even if you do not have an amicable divorce, creative negotiating or creative offers of settlement are key to make sure you ultimately can purchase a new home.
To qualify for a home mortgage, lenders look for income, and not all income is created equal. Income must be “qualifying income”. What is qualifying income? A person receiving a salary or wage as a W-2 has very clear qualifying income. Unfortunately, not everyone has a clear stream of income. Some people are self-employed, some receive large bonus income, some people have rental income, and some people rely heavily on child and spousal support.
Child support and spousal support are often present in divorce cases and often relied on by one party to qualify for a subsequent mortgage. Therefore, in order to set yourself up to qualify, you need to know the special considerations regarding support.
First, lenders generally require a minimum history of 6 months of receipt of support to consider the income and a minimum of 3 years continuance from the close of escrow to rely on it. Therefore, in your marital settlement agreements or judgments, having a history of six months reflected is very important. Even in scenarios where one party has been voluntarily paying. Receipt of the income alone is not enough; the order (marital settlement agreement, stipulated judgment, stipulated order) must have a 6-month history reflected. Further, best practice is to make sure the support is deposited directly into the recipient’s individual bank account.
And, in considering the amount of support, child support is “grossed” up 25% because it is not taxable income. For instance, if you are receiving $1,000 in child support, it can actually be considered worth $1,250 in the qualification process. Effective 2019, spousal support should be grossed up as well, as it will no longer be taxable income.
Finally, if you are the payor spouse, your debt to income ratio will be a concern when determining if you are qualified for a mortgage. In calculating your debt to income ratio, spousal support is not considered a liability, but rather, deducted from your income. For instance, if you have $10,000 monthly income, $2,000 in spousal support, and $2,000 in debt payments, your debt to income ratio is 25%. Why? Your income is $8,000 ($10,000 minus $2,000 in spousal support) and your debt liability is $2,000, which is $25% of your income. However, child support is treated as a liability. So, same scenario, if you have $10,000 monthly income, $2,000 in child support, and $2,000 in debt payments, your debt to income ratio is 40%. Why? Your income is $10,000 and your debt liability is $4,000 ($2,000 in child support and $2,000 in debts), which is $40% of your income. Knowing how the specific payments of support will affect your debt to income ratio may spark a creative settlement or offer.
Consulting with your attorney, in conjunction with a lender, with your home buying goal in mind is vital to coming out of your divorce ready to purchase a new home for your new beginning. Call our office today to consult with an attorney.