If you have ever applied for a home loan, in most cases, you were perhaps asked for a copy of your filed tax returns because they are often used to verify and calculate your qualifying income to determine your loan eligibility.
According to Fannie Mae and Freddie Mac, “recent tax reform legislation has resulted in changes to 2018 IRS tax forms and how certain income along with expenses are reported for tax filing purposes.”
I’m sure many of you already knew this or heard about it.
However, they go on to say that “some of these changes have impacted and continue to impact their selling guide requirements, while others appear to have no impact and or statistical data is not available.”
This is the part that everyone is, nevertheless, trying to figure out.
For example, regarding proof of alimony and child support payments in the mortgage lending world, a copy of your divorce decree, separation agreement, court order, or equivalent documentation typically verifies your alimony or child support obligation, not necessarily your tax return.
But effective Jan. 1, 2019, one of the new tax laws relating to divorces finalized after Jan. 1 of this year, states that the person paying spousal support can no longer deduct the amount from their taxes.
It goes on to say that for recipients, spousal support payments are no longer considered taxable income.
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This is good news for the recipients of alimony as it can now be grossed up for mortgage qualification purposes and improve your borrowing power.
Although it is now bad news for those of you paying alimony because it could be considered a liability on your tax returns and your home loan application too.
Basically, the key is the date your divorce paperwork becomes final, which considering we are half-way through the year, this should impact almost all newly finalized divorces.
Yet despite these laws, there are actually a few ways to potentially soften the impact of them on your home loan application.
Let’s say you’re paying alimony or child support and there are more than 12 months that remain.
You might be able to buy-out the remaining number of payments with either a letter from the recipient’s attorney acknowledging that payment in full is accepted or if the recipient isn’t represented by an attorney, a notarized statement that payment in full is accepted by the recipient or if those options are not available, then court approval of payment in full.
Alternatively, if fewer than 12 months remain on your alimony or child support payments, then there’s a chance you can exclude them from your debt to income ratios.
But if the exclusion of them results in a large difference to your qualification ratios, you will probably still need to show enough assets to prove you have the ability to pay off the entire remaining balance in order to avoid the decrease to your borrowing power.
Either way, you have options. Please consult with your lending professional and tax adviser accordingly.
Chris Salese can be reached at firstname.lastname@example.org or 707-363-4439. He is a licensed California mortgage lender (LO NMLS #254469 — CA-DBO #254469 Corp NMLS #1850 Equal Housing Opportunity.