You know the number one factor in getting a mortgage is how much money you make. The easiest income to verify is salaried income. Of course, lenders allow other types of income, including alimony. But, how do they calculate it? Who can and cannot use it?
We discuss all of the factors below.
Official Documentation Required
Alimony doesn’t count if it’s not official. In other words, it must be court ordered. If one spouse is not legally obliged to pay the other, there’s no guarantee of continuance. Generally, lenders want to see at least 3 years of continuing income before they will count it as income. If you have court ordered documents showing the dates that the ex-spouse must pay you, though, then it may count.
A large risk in allowing money that the two of you agree to outside of the court is that no one enforces it. What’s the worst thing that could happen to an ex-spouse that doesn’t pay? Nothing legal will happen. They might have an angry spouse on their case, but that’s about it. If it’s court ordered, the court will find other ways to make sure you get the money if your ex-spouse doesn’t pay it directly. For instance, they could garnish your ex-spouse’s wages so that you receive payment.
Generally, lenders require the following to use payments from an ex-spouse:
- Written proof of the legal obligation to pay alimony
- Proof of receipt of the income with the last 6 – 12 months of bank statements
- Proof of continuance for at least 3 years
The easiest way to verify the right to receive alimony is with the official divorce decree. You may have other legal documents the lender will accept, though. Always ask the lender what they expect.
Make Regular Deposits
A mistake many people make is how they accept the alimony payments. During the year leading up to a mortgage application, you should only accept checks or some type of direct deposit into your account. This gives the mortgage lender something to trace. They need to see for themselves that you are receiving the income on a regular basis.
If your ex-spouse pays you cash, there’s no paper trail. Sure, you may be able to show deposit slips showing the deposit of the money, but that doesn’t prove where the money originated. The lender needs to be able to see the source of the income and the date it gets deposited. Without that paper trail and regular deposit dates, you may not be able to use the money as income.
The 30% Benchmark
Lenders often use 30% as a good benchmark when it comes to alimony. They don’t want the money you receive from your divorce to constitute more than 30% of your total income.
For example, let’s say your gross monthly income is $5,000. If no more than $1,650 of that money is from alimony, you probably won’t be held to strict guidelines. If, however, your ex-spouse paid you $3,000 per month and you only brought in $2,000 of your own money, the lender would hold you to stricter guidelines.
This is strictly because the money isn’t from an employment source. There is a higher risk involved. The more money you use for qualification that comes from employment, the better. This isn’t to say lenders won’t accept payments from an ex-spouse that total more than 30% of your gross monthly income, but they’ll definitely be more careful with an approval.
For example, if your income is made up of 50% payments from your ex-spouse, the FHA program requires that you have proof of receipt for at least 12 months before applying for a loan. However, if the money only makes up 30% of your total income, you may get a loan after receiving the money for 6 months.
Now let’s take the other side of the equation. What if you are obligated to pay alimony? In this case, the money counts against you. It is not income, but rather a liability. The lender must include the payment in your debt ratio if it is a court ordered payment. Your payment history also plays a role in your approval. It’s a debt that you have to pay. If you default on it or make late payments, it could hurt your chances to get a loan.
In short, official alimony payments that you receive may help your chances of getting a mortgage. Unofficial payments cannot be included in your income. If you are the one making the payments, they will count in your debt ratio.
Make sure you have careful documentation no matter which side of the equation you are on. The lender will need to document the income or the payments and see how they affect your total debt ratio.