Going through a divorce can pose numerous emotional, financial, and familial challenges. For homeowners, one rarely considered issue, until the need arises, is refinancing the mortgage.
While many borrowers run into issues qualifying for a refinance on a single income, child support and alimony frequently add to the confusion around mortgage eligibility.
The good news? Paying child support or alimony doesn’t necessarily prevent you from refinancing, but it does change the math. Similarly, receiving child support or alimony may make it easier to qualify, provided you have the proper documentation.
How Lenders Evaluate Refinance Applications
In most cases, refinancing your home is much like obtaining a mortgage for the first time. This can include a credit check, employment verification, and a home appraisal.
However, one of the biggest factors in refinancing is your ability to repay the new loan.
Lenders assess this by comparing your monthly income to your ongoing debt obligations, including your mortgage payment, and establishing your debt-to-income (DTI) ratio, which is your total monthly debt divided by your gross qualifying income.
While guidelines can vary depending on your chosen mortgage company and loan type, most lenders limit DTI to 43%-50%.
Does Paying Child Support or Alimony Count as Debt When Refinancing?
Paying child support or alimony typically counts as debt when refinancing your mortgage.
However, this can depend on the type of agreement you have, whether it’s court-ordered or voluntary, and how many payments you have left to make. Voluntary payments are less likely to be included. In some cases, lenders may exclude support obligations scheduled to end within a relatively short period, though specific guidelines vary by loan program and lender.
Another thing worth noting is that, with alimony payments, lenders can often either add them to your monthly debt obligations or subtract them from your qualifying income. Your lender will run the numbers and generally choose the method that most positively affects your DTI ratio.
Does Receiving Child Support or Alimony Count As Income When Refinancing?
Receiving child support or alimony can count as income for a refinance, but only with the proper documentation.
This usually includes a court decree or legal mandate that clearly outlines the amount and duration of support, along with bank statements, canceled checks, or other evidence demonstrating consistent, on-time payments.
The required length of payment history depends on your lender and the type of loan you’re applying for. Conventional loans require at least 6 months of steady payments, while government-backed mortgages, such as FHA or VA loans, may require only 3 months.
In some cases, it may be possible to use voluntary child support or alimony payments, although you typically need proof of a longer payment history.
Also, support must be expected to continue for at least three years to be considered qualifying income. For example, if you’re receiving support for a 16-year-old child that will cease when they turn 18, that income won’t count.
What Documents Will Lenders Need?
When applying for a refinance involving child support or alimony income or obligations, lenders commonly request:
- Divorce decree or separation agreement
- Child support or alimony order
- Bank statements showing deposits
- Canceled checks or payment records
- Recent pay stubs and tax returns
- Mortgage statements and other debt documentation
Having these documents prepared early can help avoid delays during underwriting.
How Child Support & Alimony Affect Your Debt-to-Income Ratio
Let’s take a closer look at some examples of how child support and alimony can affect your debt-to-income ratio, both when being paid and received.
If You’re Paying Support
Paying support to an ex-spouse typically increases your DTI and can lower the amount that you can borrow.
Let’s evaluate a potential scenario in which a borrower tries to refinance their home with a lender that allows a 50% debt-to-income ratio.
In this example, the borrower has a monthly income of $6,000, $500 in existing debt, and is applying for a mortgage with a $2,300 monthly payment.
Their debt obligations and new mortgage total $2,800, equating to a DTI of 46.7%. Here, they would meet their lender’s debt-to-income requirements.
However, if the borrower were also required to pay $500 per month in child support, their total debt would rise to $3,300, bringing their DTI to 55%. In this scenario, they would not qualify to refinance unless they paid off some of their existing debts before or at closing, or otherwise reduced their debt-to-income ratio.
If You’re Receiving Support
Conversely, receiving support from an ex-spouse can potentially increase your qualifying income and may improve your chances of loan approval.
For example, let’s look at a borrower with $7,000 in monthly income and $900 in ongoing debt obligations who is hoping to refinance their loan to a $3,000 monthly payment.
Given the same 50% DTI requirement, their current debt-to-income ratio of 55.7% would disqualify them from refinancing. However, if they were receiving $400 per month in eligible alimony payments, their DTI would drop to 50%, allowing them to meet their lender’s requirements.
Special Considerations After Divorce
If you’re trying to refinance your home after a divorce, keep in mind some special considerations that may impact you.
Removing Your Ex-Spouse From the Mortgage
One of the most common reasons to refinance after a divorce is for the remaining partner to remove their ex-spouse from the mortgage. While some lenders may let you take over the loan on your own through a modification or assumption, in most cases, it will be necessary to refinance.
Depending on the terms of the divorce agreement, this may be required within a set timeframe, such as 60 or 90 days, to prevent the departing spouse from remaining financially obligated for an extended period.
Funding a Divorce Buy-Out
If your divorce agreement requires you to compensate your ex-spouse for their portion of your home’s equity, you might be able to fund this payment through an equity buyout refinance. If you meet the requirements, you could potentially borrow a higher percentage of your home’s value, and at a lower interest rate, than you could with a standard cash-out refinance.
Understanding Title vs Mortgage
It’s important to understand the difference between your mortgage and the title to your home. Refinancing can allow you to remove your ex-spouse from the mortgage, the document that pledges your home as collateral for the loan. The title, on the other hand, dictates legal ownership of the property.
In most cases, removing a former partner from the title to your home involves filing a quitclaim deed with your local county clerk or registrar of deeds. Simply refinancing will not change legal ownership.
Waiting Period After a Divorce Decree
While there’s no required waiting period after a divorce decree, you may need to wait a specific amount of time after you begin receiving support payments for those payments to count toward your qualifying income.
This waiting period can depend on your lender, the type of refinance you apply for, and whether the payments are court-ordered or voluntary. In most cases, you need three to six months of consistent, on-time payments under a court-ordered decree, and up to twelve months under a voluntary agreement.
Can Child Support or Alimony Payments Prevent You From Refinancing?
Being required to make monthly child support or alimony payments does not inherently prevent you from refinancing. However, these obligations are generally accounted for in the calculation of your debt-to-income ratio. As such, you may find it more difficult to meet lender DTI requirements, depending on your income level and other debts.
Even with a relatively high DTI, though, you may still be able to qualify to refinance if other compensating factors reduce the overall risk level of your loan, such as:
- A strong credit score and profile
- Considerable equity in your home
- Substantial reserve funds or other assets
Strategies to Improve Refinance Approval
Concerned that you won’t be eligible to refinance due to being required to pay child support or alimony payments, or because you’re not sure if the support you’re receiving will be counted as qualifying income? Here are some strategies that may improve your chances of getting approved for a refinance.
- Pay Down Other Debts: One effective way to reduce your DTI ratio is to pay down other debts, either before refinancing or at closing with a cash-out refinance.
- Consider a Longer-Term Loan: If you plan to refinance to a 15- or 20-year mortgage, consider a longer term, such as 25 or 30 years, to reduce your required monthly payments.
- Explore Different Loan Types: Each loan type has different rules for treating child support and alimony as income or debt obligations. A qualified lender can help you find the best option for your individual situation.
- Add a Cosigner: Adding a cosigner to your refinance application allows you to include their income, which can lower your DTI. Keep in mind, however, that any debts they have will be considered as well.
FAQs About Refinancing With Child Support & Alimony
Does Child Support Show Up on a Credit Report?
In most cases, child support payments do not show up on your credit report. While guidelines can vary by state, child support is typically reported to credit bureaus only when you are at least 60 days behind on your payments.
Can I Refinance if I Just Finalized My Divorce?
Yes, you can refinance right after finalizing your divorce, provided you meet the loan eligibility requirements. Some divorce decrees even require the partner retaining the home to remove the departing spouse from the mortgage within a specific timeframe. However, you’ll need to wait a minimum of three to six months to use support income to qualify.
Does Child Support Count as Debt for a Mortgage?
Paying court-ordered child support counts as debt when applying for a mortgage, which can increase your debt-to-income ratio and potentially reduce the loan size you’re eligible for. However, if you have ten or fewer child support payments remaining, your lender may be able to exclude them from their calculations.
Can You Refinance If You’re Behind on Child Support or Alimony Payments?
Yes, it’s possible to refinance if you’re behind on child support or alimony payments, but doing so may be difficult. Often, you’ll need a formal repayment plan in place, which can further impact your DTI. Plus, past-due child support or alimony payments may negatively affect your credit, also making refinancing more challenging.
Refinancing With Child Support & Alimony
For homeowners responsible for making child support and alimony payments, these ongoing debt obligations may lower the size of the loan they can qualify for. If they currently owe more than their mortgage is worth, refinancing may prove difficult.
On the other hand, homeowners receiving child support or alimony payments can use that income to qualify for a loan, provided they can provide proper proof. This typically includes court-ordered or legally binding documentation, as well as evidence of full, on-time support payments for at least 3 to 6 months.
If you’re refinancing after a divorce, comparing loan options with an experienced lender can help you understand how support payments, income, and home equity affect your eligibility and borrowing power.
