Alimony is the payment of money by one spouse to the other after separation or divorce. Its purpose is to help the lower-earning spouse cover expenses and maintain the same standard of living after divorce.
Alimony is often considered the more legal term for payments made to an ex-spouse following a divorce. These payments may also be called maintenance payments, spousal support, or support payments.
So, from one perspective, there is no ‘real’ difference between alimony, maintenance, and spousal support. While from a mortgage lending perspective, this isn’t always the case.
For example, John earns a monthly gross salary of $8,000 and pays spousal support each month of $2,000. When obtaining mortgage financing, the monthly obligation of $2,000 is usually considered a liability and has a hard hit on John’s monthly income. However, the majority of agencies (Fannie Mae, Freddie Mac, FHA) may allow the $2,000 in monthly support to be reduced from the monthly gross income.
Why does this matter?
It has a direct impact on John’s debt to income ratios which have certain limits for mortgage financing approval. If the $2,000 is considered a monthly obligation, John’s debt to income (DTI) is already at 25% before taking into consideration any additional consumer debt and housing payment. Whereas if the monthly support is deducted from John’s gross income making his adjusted gross income $6,000 – John is starting with a lower monthly income; however, he is also starting with a clean slate from a DTI perspective.
Here’s the catch – the various agencies noted above, DO DIFFERENTIATE between what can and cannot be done with alimony, maintenance, and/or spousal support. Some agencies will only allow this adjustment to gross income for alimony and require that maintenance is noted and calculated as a liability.
A Certified Divorce Lending Professional, (CDLP™), can help identify these potential conflicts between the marital settlement agreement and mortgage guidelines during the divorce mortgage planning process of the divorce settlement. A CDLP™ can offer suggested verbiage that ties the various support classifications together from an IRS perspective which may help alleviate any missteps or hurdles for the borrowing spouse.
Do you have questions about how divorce may impact your ability to obtain mortgage financing? A Certified Divorce Lending Professional’s (CDLP™) knowledge and experience can help make the transition much smoother and successful for all parties involved.
The CDLP™ brings tremendous value to the divorce team during the settlement process. Their background knowledge of family law, financial and tax planning, real property, and mortgage financing allows them to better support and assist the divorce team and divorcing homeowners.
Working with a Certified Divorce Lending Professional (CDLP™) and incorporating Divorce Mortgage Planning into the divorce settlement may help both spouses obtain new mortgage financing post-divorce.
Contact a CDLP™ today for a copy of the Divorcing your Mortgage Homeowner Workbook, a guide to credit, real estate, and mortgage financing after divorce. This workbook will help you get organized, be prepared, and understand your mortgage financing position whether you are needing to refinance the marital home in an Equity Buy-Out situation or prepare to sell and purchase a new home post-divorce.
If you’d like to start the process of getting a home, come see us at the Tammi Lindley Team. We are Portland’s premier mortgage lenders, offering hundreds of mortgage products so you can pick the mortgage that matches your needs. Contact us today and start the process of owning your dream home.