Why Divorcing Clients Need to Pay/Receive Support Immediately and Not Wait Until Final Divorce

You (lawyers) live in the world of judgments, orders and agreements. It’s somewhat precise. My world is somewhat precise as well but with different rules (or points of precision).

For example, when it comes to support (spousal and/or child), you think of what is ordered or agreed….and the exact date when it starts and stops.

I, on the other hand, think in terms of documentation. Of course, I have to live with what is ordered/agreed – every word of a decree is reviewed and underwritten in a loan application. But, remember – I am involved during the process of divorce, not just after everything is agreed.

This is important because support can be engineered in your settlements so as to accommodate mortgage financing without violating the essence of the agreement.

For instance, when it comes to support, here are the mortgage rules. Generally speaking, in order for support income to be considered qualifying income, we must document (remember that word) that the support has been received for 6 consecutive months and that it will continue for 3 or more years.

Most folks – even mortgage professionals – assume that this means the borrower cannot qualify with support income until at least 6 months after divorce. *But, this is not what the guidelines say. Fannie, HUD and VA only require documentation of the support, not its court order.

This means that two divorcing parties can, by good faith agreement, begin to exchange support payments. I say “exchange” because here’s how it looks: Let’s say the wife is trying to qualify to refinance the mortgage so husband can be released of its liability and move ahead in life without this “monkey on his back.” And, let’s say that the wife needs child or spousal support in order to qualify for this mortgage. And, for illustration purposes, let’s say that the house payment is $1,000/month, the utilities are $300, and groceries are $500/month. Since husband has been the main breadwinner, he has been paying these bills from his own account or from a joint account (even though the wife may have been, in fact, writing the checks or managing the account). Let’s also assume that the contemplated support is $1800/month. My recommendation is that wife establish her own sole/separate checking account (just as she will surely do by final divorce); and that husband begin support payments of $1800/month which wife will then use to pay the bills. Husband doesn’t actually pay anything extra (until support is ordered) so there is no loss to husband. All is whole so long as the couple “juggles” the accounts so as to create a paper trail.

You will quickly see that this is not “gaming” the system. It is, in fact, mirroring the post-divorce reality….this is how it’s going to be.  It’s the closest thing to reality that an underwriter can possibly see as she evaluates the applicant’s ability to repay the mortgage loan.

Most importantly, the documentation is established.

Here’s one more important distinction that lawyers may not usually conceive – it does not matter on what day of the month the support is paid so long as it is paid within the month for which the support is due. That’s right. You usually think of support as due on the 1^st and the 15^th or by whatever dates are standard. But, mortgage guidelines are generally unconcerned about those dates and think in terms of months more than in terms of days of the month. I know it sounds counterintuitive to the world of orders and agreements. But, here’s how it can work:

At the end of October, a couple can begin paying/exchanging support immediately. So long as the funds move before the end of the month, October counts as the first month. Conceivably, our borrower could qualify for financing near the end of February (the 5^th month) if ex-spouse pays March’s payment early. (This is a judgment call and doesn’t always work but it can under certain circumstances). This means that 4 months after we direct the couple to exchange support payments, the borrower can be closing her loan….having established a SIX MONTH pay history.

Cool, eh?

While most people assume that the support cannot begin until after divorce or until after temporary orders. But, with a literal stroke of a pen, divorcing parties can create their own loan qualifying many months earlier than by waiting until final divorce.

Let’s review.

1.  As soon as a couple seriously contemplates divorce, the non-custodial parent should begin paying (really, exchanging) support.

2. Payments should be documented as coming from payer’s sole/separate account and paid into payee’s sole/separate account.

3. Amount should be at least that which is contemplated; and, payments must be made in consecutive months...no skipped months.

4.“Juggling” the funds (so that no loss is incurred and that both parties are whole) is left to the couple. Most folks can figure it out fairly easily if they want to.

Summary

Borrowers can use support income to qualify for mortgage financing if certain documentation rules are followed. The support does not necessarily have to be ordered. But, a pay history must be developed.

A competent Divorce-Lending Specialist should advise. But, generally, here is how to do it.

1. Payer should pay from his/her own sole/separate account.

2. Payee should deposit into his/her own sole/separate account.

3. Make sure payments are made in consecutive months – no missing monthly payments.

4. Payments do not have to be made by a certain date within the month so long as payment is made before month end.

*Freddie Mac’s guidelines require that the support be ordered (as in a decree). But, this order can be by temp orders, Rule 11 Agreement, MSA, etc. Moreover, Freddie Mac is used much less frequently than Fannie Mae and I, personally, only use it to accommodate other particular nuances in a loan application.

Thanks for reading.

Noel Cookman

817-454-4555

noel@themortgageinstitute.com