What is the Impact of Child and Spousal Support on Loan Approvals
When you combine Divorce with Mortgage qualifying, the challenges for a successful outcome increase dramatically. Factor in external economic changes like fluctuating interest rates and housing values, and the complexities intensify.
So what is the impact of child and/or spousal support on residential mortgage loan qualifying?
Let's begin with the basics...regardless of divorce, mortgage approval guidelines (at least partially) center around the proposed new cash-flow for the Borrower(s) who is (are) applying for the new mortgage loan. We use a term called Debt-to-Income (DTI) ratio to measure this angle of scrutiny.
Quite simply, the DTI is a fraction, whereby the total proposed monthly debts are divided by the total qualifying income.
NOTE: there is often a discrepancy between what a Borrower & Lender may compute for qualifying income (so it is always best to have a seasoned Mortgage Loan Officer compute these calculations up front to avoid miscalculations and/or assumptions).
When we take a closer look at what specific categories of debts versus income are used, we can further dispel some of the incorrect myths about what Lenders use in these calculations.
Per below, the total new proposed housing payment is taken into consideration.
New Housing Payment
As you can see in the red font, monthly child and/or spousal support payments are factored into the debts for the Payor (the person making the payments), while they can sometimes be computed as income for the Payee (the person receiving the payments).
In the example below, we look at a sample scenario that does NOT involve child and/or spousal support. For ease, we use round numbers to articulate the computations involved. The qualifying income for this borrower is $10,000 per month (which goes on the bottom of the DTI fraction). The proposed new monthly housing payment is $4000, and the total consumer debt (minimum payments for auto loans, credit cards, student loans, etc.) is $500.
NOTE: We are not yet accounting for any monthly spousal and/or child support at this point in the calculations below.
Per mortgage guidelines, we would actually have 2 different DTI calculations.
· Front-End DTI - takes the total housing payment ($4,000) and divides this number by the total income ($10,000) to equal a 40% Front-End DTI
· Back-End DTI - uses the same math as the Front-End DTI, but now factors in the consumer debt. In this example: $4,000 + $500 = $4500 in total debts, divided by the $10,000 of total income to equal a 45% Back-End DTI.
NOTE: For purposes of this article, we are only spotlighting the Back-End DTI.
Now let's introduce monthly child and/or spousal support payments as a debt (assuming our Borrower is the Payor "making" the payments). While keeping all of the baseline numbers identical and solely introducing the $2000 per month support payments, we will be increasing the DTI ratio.
Once we add the $2000 in support payments to the existing $4500 in previously calculated total debt, we have $6500 in total debt, which equals a 65% DTI once we factor in the $10,000 in total qualifying income. As the majority of mortgage loan programs will cap at ~50% DTI, this example of a 65% DTI is unlikely to be successful in getting approved for this mortgage.
What if however, our Borrower is the payee who will be "receiving" monthly child and/or spousal support? Assuming we can count this income in our calculations (see "Rule of 6/36" below), these support payments can improve the DTI calculations for our Borrower.
In the example below, we are instead applying the $2000 support payments as income on the bottom of the fraction, which increases our qualifying income to $12,000.
Once we divide the existing $4500 in previously calculated debt, and now divide it by the $12,000 of monthly income, our DTI drops to 37.5%. This particular DTI ratio is well within the scope of approval (assuming all other parameters are met, including, but not limited to FICO score, LTV, etc.).
Amongst the biggest disconnects between the Divorcing Parties, their Legal Council, and Mortgage Lenders is how/when we can actually use monthly child and/or spousal support as qualifying income.
While a brief summary of parameters is listed in the image below, I encourage you to CLICK HERE to learn about the "Rule of 6/36" when desiring to use monthly support payments as qualifying income on a mortgage loan application.
In summary, there are a tremendous amount of divorce related nuances pertaining to mortgage approval guidelines. The above example is merely a drop in the bucket to provide perspective for those who are seeking divorce financing and/or those who are advising this population of borrowers.
My friendly advice to anyone interested in obtaining qualified representation is to seek out the following credentials:
· Certified Divorce Lending Professionals (CDLP) - in my humble opinion, this training curriculum is the highest level credential for residential mortgage lenders. CLICK HERE to learn more about the specialized training & professionalism a CDLP can provide.
· Certified Divorce Real Estate Experts (CDRE) - in my humble opinion, this training curriculum is the highest level credential for residential real estate agents. CLICK HERE to learn more about the specialized training, professionalism, and code of ethics that a CDRE brings to the table.
NOTE: Oftentimes, CDLP's and CDRE's collaborate together, which is the best of both worlds.
About the author:
Jim West, CDRE is an experienced Realtor who specializes in real estate transactions, with expertise as a trained Certified Divorce Real Estate Expert and a Certified Negotiation Expert. To schedule a complimentary meeting and discover more ways Jim can help you resolve the real estate challenges plaguing your divorce cases, call: (614) 507-5732 or email: email@example.com
To Download Jim' CV click here