Alimony and Child Support Affects Your Qualification
Alimony and child support affects your qualification. In order to qualify for a mortgage, your lender will look at every part of your finances. Your bank wants to know your income, your assets, and all the debts that you owe.
A home loan approval depends on whether your numbers add up and demonstrates that you can afford the mortgage payments. Alimony and child support, then, will impact your mortgage eligibility. It affects your loan qualification. Here’s how:
Banks cannot discriminate against you for being divorced; however, if you are making alimony payments to your former spouse, you have monthly financial responsibilities that are a part of your total monthly debt.
Most banks want a maximum of 43 percent debt-to-income (DTI) ratio. To calculate your ratio, add up all of your monthly debt payments, including your alimony payment amount. Then, divide them by your gross monthly income.
The exact debt-to-income ratio cut off varies with each lender. The higher your DTI ratio, the more difficult it will be to qualify for a home loan.
Lenders can count alimony payments as income. Most lenders have strict conditions and requirements before including your alimony payments when they are calculating your debt-to-income ratio.
Most banks will require documentation of the alimony agreement as well as a history of receipt. For example, a financial institution may require at least six months of payments that are on time and paid in full. This is to establish that the income is consistent and reliable. Partial alimony payments or payments made on a sporadic basis may impact how lenders count that income.
Paying Child Support
Most court-mandated payments are part of your financial obligations. The Ability to Repay (ATR) rule, part of Regulation Z of the Truth in Lending Act (TILA) established that “child support payments”, like alimony payments, are considered debt.
As a result, your payments are included in your debt-to-income calculation. The amount is one of several factors that impact your home loan eligibility.
Receiving Child Support
If you collect child support and hope to include the payments as income, you’ll need proper documentation.
Voluntary child support without any contractual obligation is more difficult for lenders to approve. Without a legal obligation, the payments could suddenly stop and are not a reliable source of income.
Unfortunately, even if the child support payments are court-mandated, you’ll need to establish a history of payment. That means that you need to show that the other parent has consistently made regular payments on-time and in full. You can use canceled checks, a printout from the court if the payments are processed through the domestic relations system or copies of your bank statements. Cash payments with no paper trail will not be considered.
An additional hurdle is that you’ll need to show that the payments will continue for an additional three years. For example, if your child is 17 years old and the child support payments will stop once he or she turns 18, you won’t be able to count the funds as qualified income.
If you are making alimony or child support payments, you’ll have a higher debt-to-income ratio. This may make it more challenging to qualify for a mortgage. On the other hand, if you are on the receiving end, you’ll need proper documentation to prove that the payments are reliable, in full, and will continue for the next few years.