Grossing-up sounds like something disgusting, but we assure you, it will be very beneficial for you!
Here’s what you need to know:
- Child support payments are not taxable income to the recipient or tax-deductible to the payor.
- Alimony payments pursuant to a divorce finalized after January 1, 2019, are also not taxable income to the recipient or tax-deductible to the payor. (Alimony payments for divorces finalized prior to January 1, 2019, are taxable income to the recipient and tax-deductible to the payor unless the Divorce Settlement Agreement states otherwise.)
- Property Settlement Note payments are also not taxable income to the recipient. However, any interest being paid on the note is considered taxable income to the recipient and therefore is tax-deductible to the payor. (FYI, if a Property Settlement Note is going to be used as qualified income, it follows a more stringent requirement than child support or alimony. You must demonstrate you have received consistent and on-time payments for the previous 12 months and those payments will continue for another 36 months).
So, what exactly does grossing-up mean?
In essence, grossing-up converts non-taxable income into the higher amount it would have been if it was taxable income. We do this because lenders consider your gross income (income before taxes) when determining your eligibility for a mortgage.
For mortgage purposes, you can gross-up Child Support, non-taxable Alimony, and Property Settlement Note payments by 25% for conventional loans (Fannie Mae and Freddie Mac) and VA loans and by 15% for FHA loans (other non-taxable income such as disability payments can also be grossed-up).
For example, $1000/month in child support becomes $1250/month for a conventional mortgage, but only $1150/month for an FHA mortgage.
Those higher income amounts can help you better qualify for the mortgage or refinancing you’re looking for, but remember the 6/36 rule we previously wrote about and the 12/36 rule for Property Settlement Notes we mentioned earlier in this article still apply.
How We Can Help You
As you can see, it is very important you work with a divorce mortgage expert who knows all the tools of the trade to get you the mortgage financing you need.
Please contact us for more information.