When you fall in love and prepare to say “I do,” perhaps prenuptial agreements, alimony payments and the like are the furthest things from your mind. But when you apply for a mortgage, your banker looks at these as part of your overall financial picture and considers them when reviewing your income and debts. Marriage and divorce are just two of many life events that can have financial implications for your mortgage application process.
Here are some tips from two mortgage experts and a recent homebuyer to help you better understand how prenups and alimony can affect your home buying experience.
Prenuptial agreements are valuable estate planning documents that are most commonly referenced in legal separations and divorces. Prenuptial agreements legally divide an estate of a married couple upon a divorce or the death of a spouse. These contracts typically list the debts and assets of one or both spouses and provide instructions on how to divide property or the proceeds of sold property according to the asset owner’s wishes.
These agreements are commonly used when one spouse earns significantly more than the other, has significantly more assets or has a significant amount of debt or, alternatively, just for estate planning purposes.
Also, some unmarried couples enter into a home buying prenuptial agreement in order to have a legally binding document for protection. These agreements spell out what happens if one person is unable or unwilling to meet their financial obligations. Be sure to check your individual state’s laws regarding unmarried couples who purchase a home together.
But if you and your spouse have an existing prenuptial agreement, your contract most likely outlines assets acquired prior to getting married and purchasing a home together. If you’re preparing to buy a home now, an important decision to make is whether the home will become marital property and be added to your prenup.
These are some things to consider when you have a prenuptial agreement and you’re buying a new home:
- Who will be making the mortgage payments
- Whose name will be on the mortgage
- Whose name will be on the home’s title
“A client’s prenup often takes into account debts and assets from the past,” said Katrina Beaubien, a senior product manager here at Quicken Loans. “But if you have a prenup, it likely wouldn’t be considered by a banker if it doesn’t include details about the house being purchased today.”
Ideally, before getting married, you and your partner would have candidly discussed how your prenup will impact future purchases, new assets and related decisions. Beaubien said it’s always smart to consult an estate planning lawyer before buying a home to understand how your prenuptial agreement impacts the process.
Alimony is a court-ordered payment to an ex-husband or ex-wife that can impact your ability to buy a home. Whether you’re currently receiving alimony from your former spouse or paying it, alimony makes a difference when you’re trying to qualify to buy a home.
If you receive alimony payments, you can use the income to qualify for your mortgage if the payments have been steady for the past six months and will continue for at least the next three years. If you receive alimony on a sporadic basis, then it can’t be used to help qualify you for a larger monthly mortgage payment. Regardless of what percentage your alimony payments contribute to your income, if your ex is spotty with the payments, lenders may not factor them in.
“It’s important that people provide a complete copy of their divorce decree so that the lender is able to document that income,” said Rachel Robinson, a Quicken Loans product manager. “No two divorce decrees are identical, and we need to be able to see every page so we know what you’re responsible for and the details about property.”
She said that providing copies of the payment history and a divorce decree can be a sour point for some divorcees because the decree sometimes includes very personal details.
“Perhaps a decree discusses cheating or something along those lines, but we don’t care about that. We need to see the court-ordered document for the financial details,” said Robinson. “The decree will tell us whether your ex-spouse is entitled to get money from the sale of your home, among other important details.”
My friend Reshunda A. recently purchased a cozy home in Farmington Hills, Michigan. She recalls being surprised by all of the required documentation that she and her ex-husband had to provide to her mortgage banker.
“I know it can be a lot to provide all of the necessary documents,” said Reshunda, who closed on her home in late March. “The documentation they needed did include a lot of personal information, but I know that’s what they needed to understand my finances.”
Reshunda even had to ask her ex-husband to provide some bank statements to verify their past financial transactions.
“If you receive alimony or child support and you are buying a home, be prepared to provide court documentation that shows how long you’ve been receiving it, how much you receive and how many years you’ll receive it in the future,” she explained.
On the payment side, alimony is considered a debt, and it can reduce your borrowing power significantly. If alimony payments are verifiable and determined to be ongoing, a lender will include it in your ratio of monthly debt payments. Typically, if your total monthly debts, including alimony payments, are equal to more than 30% to 45% of your total income, you may not qualify for a mortgage.
“Whether alimony is income or a debt, we’re relying on the divorce decree to evaluate this transaction,” said Robinson. “We have to look at the frequency of payment, among other things. So providing proper documentation is important.”
Payees and recipients of alimony can provide bank statements, canceled checks or any related court documents as acceptable verification. If a verbal agreement was reached between a divorcing couple, a lender may request that a notarized document or written agreement be drawn up by an attorney.
Always be smart and proactive when it comes to documentation for a prenup or alimony for your home buying process. Whether you’re divorced, legally separated or engaged to be married, keep a copy of your legal documents readily available, no matter how old they may be.
“My advice is to be prepared for your lender to be totally in your business,” said Reshunda, who is settling into her home with her son. “You have to have a lot of patience for the process. I’m glad that I hung in there!”
If you’d like to share any helpful tips regarding prenuptial agreements or alimony, please leave your comment below.
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