How to work with Property Settlement Notes in a Divorce with Mortgage Financing

Property Settlement Note – a deferred payment in property settlement used to equalize property.

• Used to equalize property distribution in a divorce
• Income from the note is not taxable to the recipient although interest is
• Only survives bankruptcy in certain situations

When divorcing couples negotiate the terms and conditions of a property settlement, they agree to a structured settlement, which is a series of smaller payments paid over time, as opposed to a lump-sum payment. In this routine, a series of payments over a period of time comes to more than the agreed upon settlement sum because the recipient normally receives interest to compensate for the delayed payment.

A property settlement note is not taxable to the recipient because the IRS says that the transfer of property in a marriage is not taxable and in this scenario, the property settlement note is still a division of property. However, any interest earned and paid as a term of the property settlement note is taxable income.
Important Note regarding income from property settlement note

Income from a property settlement note is not always considered ‘qualifying income’ for mortgage qualifying purposes and if the income from the property settlement note is needed for qualification then it is important for you to consult with a mortgage professional who understands divorce guidelines because you want to make sure that future financing plans are achievable.

Working with a Property Settlement Note & Mortgage Financing
Often misunderstood mortgage guidelines are the reason for mortgage applications being denied and creating the misconception that mortgage financing is extremely hard to obtain. Working with a knowledgeable mortgage professional who understands how divorce situations transfer over into mortgage guidelines is key for setting your divorcing clients up for success post divorce. Understanding that various sources of income have varying requirements in order to be considered as ‘qualified income’ is another key component. Let’s take income from a property settlement note as an example.

There are two standard requirements that need to be met in order for income from a Property Settlement Note to be used for mortgage qualifying purposes:

• A copy of the note showing payment terms and proof of continuance for 36 months from the date of application.
• Proof of receipt of payment for the most recent one year (12 months).

To further discuss how to utilize income from a property settlement note when obtaining mortgage financing please don't hesitate to reach out.