Tag Archive for: alimony

Grossing-Up Child Support, Alimony and Property Settlement Note Payments

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 and/or 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.

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Can Alimony and/or Child Support Payments Qualify as Income for a Mortgage or Refinancing After Divorce?

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If you are divorced or are going through a divorce, you might assume that receiving alimony and/or child support payments will qualify as income to refinance your current mortgage or get a new one.

Unfortunately, you may discover that is not necessarily true.

Requirements for Alimony and/or Child Support to be Considered Qualified Income for a New Mortgage or Refinancing

In general, the alimony and/or child support you are or will be receiving will only qualify as income if:

  1. It is subject to a Divorce Decree or a Divorce Settlement or Separation Agreement and, in general,
  2. It passes the “6/36 rule.” This rule applies separately to the alimony payments and the child support payments. You must be able to prove you have consistently received each payment separately for at least the previous 6 months and that you will continue to receive each for at least 36 more months (3 years) from the date of the closing.

In order to prove the 6/36 rule, you will have to show that payments were consistently received on time for the previous 6 consecutive months using bank account statements, deposit slips, or some other proof of receipt. You will also be required to provide the Divorce Decree, Divorce Settlement, or Separation Agreement that stipulates the amount and duration of Alimony and/or Child Support, along with evidence of your children’s ages (birth certificates) to show that they will be young enough for you to continue to receive Child Support for at least 3 more years after closing. (The age of emancipation – when child support is no longer required to be paid – is typically 18 or 21 in most states.)

If you are also receiving payments as part of your divorce under a Property Settlement Note (for your share of a business or other property), you must show evidence that you have received the payments consistently and on time for at least the previous 12 months and that you will continue to receive those payments for at least 36 more months from the closing. You could call this the “12/36 rule” for Property Settlement Note payments.

Click Here to Learn More About Child Support, Alimony, and Property Settlement Note Payments.

How We Can Help You

These are just some of the many unique aspects of refinancing your current mortgage or getting a new mortgage if you are divorcing or divorced.

Unfortunately, many divorce attorneys, loan officers, and mortgage brokers are not familiar with all the nuances of mortgage financing in the context of divorce. (There are many others and we will write about them in future articles.)

Ideally, you want to structure your Divorce Settlement Agreement in the best way possible so you will not have any obstacles when trying to refinance your current mortgage or get a new one.

Therefore, it is very important that you work with a divorce mortgage expert during the divorce process and not after your divorce is finalized when it will be very difficult, if not impossible, to make any changes. Please contact us for more information.

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