Alimony And Your Mortgage: How To Qualify
At first glance, it might not seem like alimony payments and the mortgage application process have anything to do with one another. However, you can actually use alimony payments as an income stream when applying for a mortgage and help you secure a home loan.
On the other hand, if you currently pay alimony to an ex-wife or ex-husband, your lender considers these payments to be debt. Read on for more information about how alimony payments impact you when you apply for a home loan.
Can Alimony Help You Qualify For A Mortgage?
You’ll need to submit proof of all of your income streams when you apply for a mortgage, and lenders consider alimony checks to be a valid source of income. Alimony can boost your total income and can, therefore, convince lenders to extend you a larger mortgage.
Keep in mind that alimony payments are different from child support payments. Alimony, which is sometimes referred to in court documents as spousal support or a spousal maintenance payment, is a payment from one spouse to another that provides support following a divorce.
Courts look at the length of the marriage, the earning power of both spouses and the reason for divorce when they determine who pays alimony. You don’t need to have any children to receive or pay alimony. You might pay alimony for as little as a few months or for years, depending on your state’s laws and the length of your marriage.
Child support is a court-ordered payment that a parent pays to another parent following a divorce. The parent who has primary custody of the child is usually the one who receives child support payments, though joint custody can complicate this arrangement. Child support is usually paid out until the child turns 18 years old. It’s possible to receive both alimony and child support payments simultaneously if your ex-spouse is the mother or father of your child.
You can list both your child support payments and your alimony payments as streams of income when you apply for a mortgage as long as you meet a few conditions. First, you need to have a documented history that your spouse makes his or her payments on time for a period of at least 6 months. If your ex-spouse doesn’t make his or her payments, your mortgage lender won’t consider this a part of your income, even if your ex-spouse is legally required to make the payments.
You can only count alimony as income if you have a documented history that your ex-spouse has paid alimony on a regular basis and owes at least 3 more years of alimony payments. Child support also has similar limitations. If your lender sees that you receive child support payments but your 17-year-old has a birthday next month, don’t expect your lender to count it as income.
Your lender may also not consider your payments in your income calculation if your alimony or child support is in jeopardy. For example, if your ex-spouse has an outstanding petition to cut off payments, it may not be considered.
When You’re The One Making Alimony Payments
Are you the one paying alimony or child support? If so, it could affect your mortgage prospects because lenders consider alimony and child support to be outstanding debts. When evaluating your mortgage application, lenders look at something called your debt-to-income (DTI) ratio. This percentage explains how much of your monthly gross income goes toward paying off recurring debt.
You can calculate your DTI ratio by dividing all of your monthly debts by your total monthly income.
For example, let’s say that your monthly bills include a car payment ($100), rent ($800), a student loan payment ($200) and a credit card payment ($50). Let’s also say that you earn $6,000 a month before taxes.
To find your DTI ratio, you would divide your total debt amount by dollar ($100 + $800 + $200 + $50 = $1,150) by your total gross income ($6,000) and multiply that number by 100. In this example, your DTI ratio would be about 19.2%.
It’s best to keep your DTI at 50% or under when you apply for a mortgage. If child support and alimony push your DTI past 50%, you might have a harder time getting favorable terms or getting a loan at all. You’ll have to work on decreasing your recurring debt before applying for a mortgage.
There are ways that you can make up dents in your income report that are due to child support or alimony payments. Don’t stop making your payments just because you’re ready to buy a home.
How To Qualify For A Mortgage With Alimony Payments
Get Your Documents In Order
Before you approach a lender and ask about a mortgage, gather the following documents:
- Copies of your debts. Mortgage lenders want to know how much you pay in monthly bills. Keep copies of receipts from all of your monthly expenses, including rent, utilities, credit card minimum payments, child support and alimony payments that you pay out or take in and other debts such as student and auto loans. Also, record the names and addresses of your debtors so your mortgage lender can verify your debts.
- W-2s from the last 2 years. Mortgage lenders usually require at least 2 years of W-2s from your employers. If you have more than one job, bring W-2s from all of your jobs from the last 2 years.
- Past 2 years of tax documents. Mortgage lenders may require you to bring 2 years of tax returns to verify your income, especially if you’re self-employed or an independent contractor. Most lenders won’t lend to you if you haven’t been self-employed for at least 2 years. They may also ask to see your 1099s or profit/loss summaries. If you’re both an employee and self-employed, bring at least 2 years of tax documents as well as 2 years of W-2s.
- Child support and alimony payment documentation. Mortgage lenders want to see that your ex-spouse pays his or her child support or alimony payments regularly. Make copies of all checks you receive and print bank statements that prove that your ex-spouse has made payments for at least 6 months. Bring along documentation that proves that your ex-spouse must make payments for at least 3 more years.
- Documentation of any other income sources. If you have any other income sources like a pension, survivor’s benefit, regular commissions or overtime from your job, annual bonuses, royalties from a book you’ve written or a TV show or music that you stream, you can count it toward your income as long as you can document it. Bring along any bank statements, letters or checks that prove you’ve received the income regularly for a period of at least 12 months.
What You’ll Also Need To Consider
Keep in mind that your income, alimony payments and DTI are only a single piece of the overall mortgage application puzzle. Your lender also looks at your credit score and the amount of money you have for a down payment.
Your credit score is a three-digit number that tells lenders how likely you are to repay debt. Your score is based on several factors, including:
- Your payment history, or how often you pay at least the minimum balance on your credit cards and loans
- Your revolving credit utilization, or how much credit you use
- How much credit you have
- How old your accounts are
- Your debt amount
- How often you apply for new credit
Many home buyers believe that they need to have at least a 20% down payment for their mortgage lenders if they want a loan. Fortunately, this is no longer the case for the majority of lenders. Many private lenders issue loans with as little as a 3% down payment, and government-backed loans like FHA loans may require as little as 3.5% down. USDA loans have no down payment requirement. However, if you’re able to offer a larger down payment, your lender may issue you a larger loan and they may also offer you a lower interest rate.
Get Started With Your Mortgage
Do you have your documents in order, know your credit score and your DTI? It’s time to get preapproved for your loan once you’ve chosen a mortgage lender.
Visit your mortgage lender with all of your financial documents or open an account online with Rocket Mortgage® by Quicken Loans®. Whether you’re applying in person or online, the Home Loan Experts at Rocket Mortgage® can answer any of your mortgage questions along the way.
Alimony can boost your total income and can even result in a larger mortgage. You can list both your child support payments and your alimony payments as streams of income when you apply for a mortgage as long as you have a documented history that your spouse makes his or her payments on time.
On the other hand, if you’re the one making alimony or child support payments, this counts as recurring debt. It’s a good idea to calculate your DTI and keep it under 50% when you apply for a mortgage. You’ll also want to be sure your credit score is in tip-top shape and that you have enough money for a down payment.
Also, be sure to get your documents in order whether you’re the one paying or receiving alimony. Search in advance for alimony records, child support payment checks or tax records if your mortgage lender requests them and keep them in a safe place for future reference.
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