Divorce can be a complicated and messy part of life. It can also create some potential complications when it comes to looking for a VA home loan.
Lenders can count child support payments as effective income toward a mortgage, and that can help get veterans into the price range they want. But spouses who are paying that monthly support will have that money counted as an outgoing liability by mortgage lenders.
For prospective VA borrowers who are divorced, child support can sometimes play a make-or-break role in the loan process.
Child Support as Income
When it comes to VA loans and income, lenders are always looking for three key attributes: stable, reliable and likely to continue. Child support can be counted as stable and reliable income for prospective borrowers, but it needs to meet certain criteria. Here’s a look at some of the primary considerations:
- A court must have ordered the payment of child support. You can’t count income a spouse contributes outside of a court-ordered agreement.
- Your child support must continue for at least three years after you close on the loan. You would need to have the terms of your child support, including that span into the future, documented in writing.
- There will likely be a “seasoning” period required by the lender. This basically means the lender will want you to have been receiving child support for a certain number of months before you can count it as effective income. Seasoning periods can vary anywhere from three months to a full year depending on the lender and even by the type of underwriting procedures a lender uses.
- The child support you receive is generally non-taxable income. Consult with your lender to see if your child support income can be “grossed up,” which may help lower your debt-to-income ratio.
Be sure to cover child support as income with your loan specialist, and see how different lenders evaluate your specific situation.
Child Support as Liability
The calculus changes when you’re the one paying the child support. This is the kind of regular installment payment that lenders must count when calculating your debt-to-income (DTI) ratio and your residual income.
Child support that’s in arrears is typically considered derogatory credit. Lenders often have a cap on the amount of derogatory collections a prospective borrower can have, which means getting behind on payments can jeopardize loan eligibility. Child support in arrears will often have to be paid in full before a VA loan can close.
If you are paying child support, be prepared to provide your loan specialist with documentation of this liability such as your judgment, any subsequent modifications and proof of payment amounts. Alternatively, if you are no longer required to pay child support you will need to show not only documentation of the original order but also documentation of when the liability ceased. If you do not have a specific order terminating the child support order you may be asked to provide a letter explaining the situation.
Child Support Work-Around
If your child support payments make it tough to qualify for your dream home, consider seeking a lower loan amount. That will result in a lower monthly mortgage payment, which, in turn, lowers your overall debt and increases your residual income level. It’s a bummer to wind up looking for homes in a lower price range, but unless you can muster another income stream that’s often the only option.
Talk to a Veterans United loan specialist about child support and your VA loan opportunities at 855-524-7279.
Photo courtesy of Smath.