By Arthur Saito
Many clients come to us with questions regarding the purchase or refinance of a residential home. This is particularly true in the area of family law. Often, one spouse wants to retain the marital home, perhaps to keep the children in a stable environment or because it is a good investment. Sometimes they simply love the home. If spouses come to an agreement that one spouse will “buy out” the other spouse’s interest in the home, the spouse who receives the home must more often than not refinance the home in order to pay the other spouse his or her interest and remove the other spouse’s name from the title to the home and/or the existing mortgage.
A party’s income is one of the critical factors in determining whether or not a person can refinance his or her home. The principles of refinancing a home are also applicable to the purchase of a new home. The purpose of this article is to provide you with the basic lender guidelines for income for a conforming home loan and a non-conforming home loan, with particular attention paid to spousal support as a source of qualifying income.
A non-conforming loan, commonly referred to as a “jumbo loan”, is any home loan that exceeds $417,000. A conforming home loan, on the other hand, is any home loan less than this amount, underwritten to specific guidelines provided by Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”).
Conforming Loans
Conforming home loan lenders underwrite to industry standards provided by Fannie Mae or Freddie Mac, The Federal House Administration (“FHA”) provides another commonly used set of guidelines with potential benefits for individual situations. There are other entities with differing guidelines, such as the U.S. Department of Veterans Affairs and U.S. Department of Agriculture. However, because these loans make up a very small percentage of loans that are generated, their guidelines will not be covered in this article.
Fannie Mae and Freddie Mac look to a variety of sources to determine a borrower’s income. Many borrowers earn a regular salary, or work a set number of hours per week. This income is easy to calculate. Other borrowers have variable incomes, often through bonuses, commissions, or variable hourly rates. These types of income require an average over time to “normalize” the variability. Either way, these lenders look at two years of the borrower’s work history. If you do not have to account for variability, this work history need not be at the same job, the same employer, or even cover two consecutive years. The two years of work history must be documented in the borrower’s federal tax returns if you have to account for potential variability in income, there needs to be data from the borrower’s specific job, with lenders using an average of the borrower’s income over these two years. The rules differ slightly for a borrower that is self-employed, but it’s easiest to think of self-employed income as a variable income with the added component of expense. These situations may warrant a loan on less than two years of history, dependent upon computer-based underwriting results, but this is rare. Demonstrating at least one year of work history is a strict minimum requirement for Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac may consider spousal support in a borrower’s income if payments have been received for 6-12 consecutive months following completion of the divorce or separation proceedings and if the spousal support award will continue at the same amount for at least 36 months following the close of the loan. Recording a spousal support award with the county recorder’s office is a strict timeline requirement. A recorded temporary spousal support award that states the amount of spousal support to be paid and 6-12 months of consecutive payments received by the borrower may be consider in a borrower’s income. Even if a borrower has not received 6-12 months of temporary spousal support payments (before a final award of spousal support is made) the number of months temporary spousal support was received count towards the 6-12 month period if the temporary spousal support award was recorded and the amount of temporary spousal support at least matches the final spousal support amount. All spousal support payments received by the borrower must be documented.
The FHA looks at most of a borrower’s income in the same manner as Fannie Mae and Freddie Mac. However, the spousal support treatment is more beneficial in the sense that only 3 months of consecutive spousal support payments need to be received by the borrower after the divorce or separation is final. The borrower must show that the spousal support award will continue at the same amount for at least 36 months following the close of the loan. With regard to temporary spousal support, the FHA’s beneficial treatment continues. A temporary spousal support award that stated the amount of spousal support to be paid and 3 months of consecutive payments received by the borrower may be considered in a borrower’s income. Again, even if a borrower has not received 3 months of temporary spousal support payments (before a final award of spousal support is made) the number of months temporary spousal support received counts towards the 3 month period if the temporary spousal support award was recorded and the amount of temporary spousal support at least matches the final spousal support amount. As mentioned above, immediately recording spousal support awards is a strict timeline requirement. All spousal support payments received by the borrower must be documented.
Non-Conforming Loans
Lenders providing non-conforming loans look at a borrower’s income in the same manner as Fannie Mae, Freddie Mac, and the FHA, albeit with one major restriction: A borrower must document a two year work history by providing two years of federal tax returns. There is no on-year minimum under any set of circumstances. In addition, the provisions regarding spousal support are more stringent: A borrower must have received spousal support for 12 consecutive months after the divorce or separation is final. Again, the borrower must show that the spousal support award will continue at the same amount for at least 36 months following the close of the loan. In addition, temporary spousal support is typically not considered in a borrower’s income. If temporary spousal support is counted, a recorded temporary spousal support award stating the amount of spousal support to be paid and 12 months of consecutive payments received by the borrower are required. Even if a borrower has not received 12 months of temporary spousal support payments (before a final award of spousal support is made) the number of months temporary spousal support was received counts towards the 12 month period if the temporary spousal support award was recorded and the amount of temporary spousal support at least matches the final spousal support amount. Again, immediately recording spousal support awards and documenting all spousal support payments received are crucial to the loan process.
