This is a guest blog from my friend, Margie Hofberg, a divorce refinancing wizard from Residential Mortgage Center, Inc., in Montgomery County, Maryland. She has helped work on refinancing former marital homes, as well as getting one or both spouses new mortgages.
Here is some breaking news from them, making refinancing even easier than it has been:
We received some really good news from our lenders this week for those borrowers with alimony obligations. As many of you know, a crucial test of a mortgage borrower’s ability to repay is called the Debt-to-Income ratio (DTI). In simple form, the DTI is calculated by dividing your total monthly fixed payments (housing expense, car payment, installment loans, etc.) by your total monthly gross income. For example, a borrower who makes $10,000.00 per month and has $3,500.00 in fixed monthly payments would have a DTI of 35%, which is perfectly acceptable for a conventional mortgage.
Previously, alimony obligations were considered part of a borrower’s fixed monthly payments. In the above case, let’s say that $1,500.00 of the $3,500.00 monthly payment is alimony. Under the new rules, we have the option of treating the alimony obligation as a deduction from income rather than as a fixed monthly payment. The math is clear. Now the DTI is only 24% ($2,000.00/$8,500.00).
Let’s make this more concrete. This example assumes a monthly amount for taxes and insurance of $500.00 and an interest rate of 4.00%. Under the old rule, a borrower with $10,000.00 of monthly income and a $2,000.00 alimony obligation looking to buy a house would qualify for a mortgage of approximately $410,000.00. Under the new rule, treating the alimony obligation as a deduction from income rather than a fixed monthly payment, the borrower would qualify for a mortgage of approximately $640,000.00! Quite a difference.
This is a real game-changer and will be of significant help to clients who have alimony obligations.