If you pay alimony or child support, will you be able to get a home loan?
Does it matter if your lender deducts alimony obligations from your income, or considers it a debt? Heck yes!
Here is an example:
You want to buy a home for $800,000 with 20% down. You have no debt (i.e. car payment, credit card debt or student loan debt). Your alimony obligation is $3,000 per month.
If the lender considers alimony a debt, you will need to earn $17,000 per month to qualify at a 43% DTI (debt-to-income ratio).
If the lender deducts alimony from your income, you will only need to earn $13,000 per month to qualify. Why the big difference?
You need income of approximately 2½ times the amount of the debt to overcome the debt; because the DTI is capped at 43% by many lenders (some allow a higher DTI, some require a lower DTI, but 43% is standard).
The DTI is calculated by adding your total debt to PITI (total home payment including tax, insurance and HOA dues, if applicable) and dividing that figure by your gross monthly income.
If the lender counts alimony as debt, PITI will be approximately $4,270; debt is $3,000. The calculation is $7,270 divided by $17,000 = 43%.
If the lender deducts alimony from income and you earn $13,000 per month, by lending standards you earn $10,000 per month (deduct $3,000 from your income of $13,000). $4,270 divided by $10,000 is 43%.
Child support is always considered debt, never deducted from income. However, both alimony and child support are treated like installment debt. Most lenders will not count installment debt in the DTI calculation if you have 10 months or fewer remaining.
If you pay alimony or child support, it is important to ask your lender these questions before going to the trouble of applying for a loan and paying for an appraisal:
Do you consider alimony a debt, or do you deduct it from income?
Will you omit alimony or child support from the DTI calculation if I have 10 months or fewer remaining for the obligation?
Please calculate the DTI before you run my credit or ask me to pay for an appraisal.
The last thing you want to do is get into escrow, pay for an appraisal, and then the underwriter does the calculation and tells you that you don’t qualify. Many loan officers do not know the math underwriters use to calculate the DTI, especially for self-employed people. If your loan officer cannot show you the calculation, then my website provides the tools to calculate both your income by lending standards and your DTI.
If you have questions or want help assessing your situation, you can contact me at 877-728-2008; CustomerCare@HollyGustlin.com