Question: IS ALIMONY INCOME FOR MORTGAGES PURPOSES?
Below is a recent question from a current client. It is a two-pronged questions involving alimony qualifying for mortgage income and her husband’s lucrative business.
“I have a question about going for a loan. If I was able to keep our home and had to refinance, will the lender accept maintenance (alimony) as part of my income? I make very little money now as I have been a stay at home mom for the past 15 years and my husband has his own business which he nets about $200,000 per year.
One of our agreements is that I keep the house and don’t go after the business but if I need to refinance the home, I’m wondering if I will be able to refinance based on maintenance being the majority of my income at the moment or should I investigate whether going after my husband’s business would be more equitable? I know that is just more lawyer fees.”
The first prong of Sally’s scenario appears to be relatively straight forward. With regard to the issue of her husband’s business, there are various complexities to consider.
Classifying Alimony As Income for Mortgage Qualification
To answer the first part of the question without any more details, yes, alimony is considered income for purposes of a mortgage. With many lenders, a period of consistent payments must be proven before a refinance would be permitted. In other words, after divorce, with a proven history of alimony income, the alimony recipient could qualify for a mortgage, after 6 – 12 months in some states.
Below are additional considerations…
- Will the length of the alimony payments cover the length of the mortgage? A typical mortgage is 30 years. The other alternative is a 15 year mortgage, but the monthly payments are much higher. This leads up to THE most important questions here: Will she run out of money or will her support end before paying off the mortgage? How long does she plan to remain in the home?
- In general, the mortgage companies approve the loan where the monthly mortgage payment is approximately 28% of the individual’s total monthly income. Will she actually qualify? Has she checked with a mortgage broker to determine what the required minimum support figure would need to be?
- Has she created a post-divorce budget so she knows what she will need to spend each month on housing, transportation and personal items, so she can afford at least the basics AND a mortgage?
- Has her attorney suggested, addressed or evaluated any of these issues? If so, would the legal fees be worth the process?
Divorcing Spouses with Businesses
There is no doubt this is a complex subject. There are many factors that determine whether a wife is entitled to a portion of her husband’s business.
- The first factor involves the length of the marriage and the business ownership time frame. If the business began prior to or early in the marriage and contributed to the household income, in most states it would be considered a joint asset. If the business was opened well before the marriage or after a separation, there are legal details to be considered that are state specific.
- Another consideration is whether the business was family owned. It must be determined whether other family members continue to have ownership rights.
- In some states, the funds used to invest in and sustain a business may be considered separate property. Again, this is a legal issue to be evaluated by an attorney in the state of venue.
- Further review of the value and the percentage of value considered to be joint marital property subject to division can only be accurately valued by a specialized professional, a forensic accountant.
Another very important factor is the type of business. In a professional practice there may be assets such as real estate and equipment. In other practices there may be recurring revenue from existing clientele such as physicians, dentists and financial professionals with renewal commissions. Alternatively, a construction type business may not have these types of financial characteristics.
For practical purposes, when a spouse realizes their business will be valued…
…in too many cases they will “cook the books” or come down with a bad case of SIDS, Sudden Income Deficiency Syndrome.
It is therefore important to tread lightly in this area, and also to get records for the past 5 years for a historical background on the business and profits.
It would be prudent for Sally to gather as much information as she can quietly, relating to the factors mentioned above, and review the feasibility of the business valuation process with a forensic accountant.
Regarding the “agreement” she is considering…
…if Sally is entitled to a share of a significantly valued business, she may not need to refinance her home. It is possible her share of the business could equal or at least make a significant contribution to the balance on the mortgage. Of course the equity and mortgage balance figures would need to be reviewed to consider the viability of this strategy. If such an arrangement were to come to fruition, Sally could have some, most, or all of the alimony to spend on the additional necessities.
Of course many circumstances and details would affect a matter such as Sally’s. However it appears to be prudent to at least investigate the preliminaries. A consultation with a divorce financial specialist is a good starting point.
There are many different things to think about when you’re considering divorce.
Having a family business can certainly make the negotiations somewhat more complicated, but should not become an intimidation.