Mortgage lenders often take a look at proof of income before extending an offer. Lenders want to make sure that buyers have the means necessary to pay off their loans. Proof of income can include things like past check stubs and past income tax statements. But what about structured settlements?
What is a Structured Settlement?
Structured settlements are regular payments from a lawsuit over a long period of time. These are often given in cases like personal injury or worker's compensation lawsuits. They can be bought, sold, transferred, and inherited. They are an excellent source of income because they are regular and they are often tax-free.
Technically, you don't have to declare that you have it since it's not considered to be income. But there isn't a good reason to hide it either. If a lender knows that you have a regular source of income from a structured settlement, it should improve your odds of getting a better deal.
There are some caveats. First, the banks will want to know how long your settlement will last. If it is going to end soon after the mortgage starts, they may not count it. Second, if you are relying on it as your only source of income, then you'll need to prove you have enough to pay for your other living expenses as well as paying closing costs. No bank wants to get through the complex process of setting up a mortgage then find the buyer can't pay closing costs!
Should You Sell Your Settlement?
You might ask, should I sell my structured settlement? Selling yours can net a large chunk of cash all at once for paying down a mortgage. If you can buy a house all at once, and can pay the fees and possible taxes for cashing out early, and can support yourself without the structured settlement, it is something to consider. However, for some, it’s better to keep it for the time being if you want to use it for proof of income.
If you want to use your settlement, you will need to show some documentation. You'll need the legal paperwork that outlines the terms. You'll also need to show proof that payments are getting deposited into an account you can pay the mortgage from. Since you'll usually need to show bank statements anyway, this should be easy to prove.
The bank may also require some information paperwork from the administrator of your structured settlement provider. (The information for this should be in your settlement paperwork.) If there is contact information, they may fax over the required paperwork to the administrator to get the necessary signatures.
EDITOR'S NOTE: Receipt of funds must continue a minimum of 3 years after closing.
In short, structured settlements can be an excellent proof of income to mortgage lenders. As long as you can document that you are receiving payments and that your payments are going to last a while, it should be accepted. It's even better than some jobs because it won't go away if there's a shift in the economy. We recommend using them.
*Not intended as accounting or investment advice. Contact your tax preparer for more information.
Author bio: Andy Bell; regular contributor to the AmeriFirst blog.