Avoid Language Traps in Divorce Settlement Agreements

Avoiding Language Traps in Divorce Settlement Agreements That Could Affect Your Ability to Obtain Mortgage Financing.

We know it is important to be very mindful of the words used in a divorce settlement agreement in order to avoid any language traps and future conflict. Word choice can have an effect on the divorcing client’s ability to obtain mortgage financing as well. While it may not be top of mind to word the divorce settlement agreement to meet mortgage guidelines, it could significantly help divorcing clients to clarify certain terminology used in the settlement agreement.

The terms “alimony”, “maintenance” and “spousal support” are often used interchangeably to describe payments made by one spouse to another after a divorce. The terms may be identical in meaning but not necessarily in the eyes of an underwriter.

As an example:  From a liability/debt perspective, FHA guidelines differentiate between alimony and maintenance while other agencies do not.

If your divorcing client is paying ‘maintenance’ and needs to obtain mortgage financing, you can help them avoid any terminology issues by clarifying that alimony and maintenance are considered to be the same. It could be beneficial to include a clarifying statement such as:

“All maintenance payments paid by Husband to Wife pursuant to this agreement are intended to constitute alimony.”

Equalization payments as income can be another item of contention for mortgage approval. Often times a divorcing client prefers to have what would typically be considered maintenance to be classified as an equalization payment to mitigate income taxes. However, since a property equalization payment is intended to equalize the final division of property between parties to a divorce, the equalization payments may more likely be determined as income from a property settlement note during mortgage underwriting. There are strict mortgage guidelines on income from property settlement notes. The recipient must document 12 months receipt of the equalization payment before it will be considered as qualified income for mortgage qualification purposes.

To avoid equalization payments to be considered as property settlement notes, verbiage within the divorce settlement agreement should detail out the payment schedule as well as stretch equalization payments out over a three (3) year period in order to meet the ‘continuance’ requirement for qualified income.

If I can provide guidance in making sure there are no language traps between the intent of the divorce settlement agreement and mortgage guidelines, please don’t hesitate to contact me. It is much easier to get it right the first time than risk mortgage denial because of word choices or lack of clarification.