Choosing the words carefully in the divorce settlement agreement can help avoid language traps that could affect the ability to obtain mortgage financing.
We know it is important to be very mindful of the words used in a divorce settlement agreement in order to avoid any language traps and future conflict. Word choice can have an effect on the divorcing client’s ability to obtain mortgage financing as well. While it may not be top of mind to word the divorce settlement agreement to meet mortgage guidelines, it could significantly help the divorcing clients to clarify certain terminology used in the settlement agreement.
The terms “alimony”, “maintenance” and “spousal support” are often used interchangeably to describe payments made by one spouse to another after a divorce. The terms may be identical in meaning but not necessarily in the eyes of an underwriter.
As an example: From a liability/debt perspective, some agency guidelines differentiate between alimony and maintenance while other agencies do not. Meaning that if the divorce settlement agreement refers to the support payment as maintenance, this dollar amount may need to be considered as a liability instead of used as a reduction to income. Why does this matter? Because it can have a major negative effect on the borrower’s debt to income ratios and may be the difference between obtaining mortgage financing or not.
If your divorcing client is paying ‘maintenance’ and needs to obtain mortgage financing, you can help them avoid any terminology issues by clarifying that alimony and maintenance are considered to be the same. It could be beneficial to include a clarifying statement such as:
“All maintenance payments paid by Husband to Wife pursuant to this agreement are intended to constitute alimony.”
Equalization payments as income can be another item of contention for mortgage approval. Often times a divorcing client prefers to have what would typically be considered maintenance to be classified as an equalization payment to mitigate income taxes. However, since a property equalization payment is intended to equalize the final division of property between parties to a divorce, the equalization payments may more likely be determined as income from a property settlement note during mortgage underwriting. There are strict mortgage guidelines on income from property settlement notes. The recipient must document 12 months receipt of the equalization payment before it will be considered as a qualified income for mortgage qualification purposes.
To avoid equalization payments to be considered as property settlement notes, verbiage within the divorce settlement agreement should detail out the payment schedule as well as stretch equalization payments out over a three (3) year period in order to meet the ‘continuance’ requirement for qualified income.
If I can provide guidance in making sure there are no language traps between the intent of the divorce settlement agreement and mortgage guidelines, please don’t hesitate to contact me. It is much easier to get it right the first time than risk mortgage denial because of word choices or lack of clarification.
Certified Divorce Lending Professionals are trained to work as financial neutrals in a divorce situation. Their goal is to look at all options and remove as many hurdles as possible for both spouses who wish to obtain mortgage financing. The verbiage, or lack thereof, contained in the divorce settlement agreement can be an obstacle for either party going forward once the divorce is final. A CDLP’s goal is to help recognize these obstacles and set each party up for success.
Always work with a Certified Divorce Lending Professional (CDLP) when going through a divorce and real estate or mortgage financing is present.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.
Copyright 2019 Divorce Lending Association. No portion of this post may be reproduced without the written consent of the Divorce Lending Association.