Co-applicant is listing her only source of income as the child support. Loan documentation only lists a letter from her husband stating what he pays her. Is this considered third party documentation or do we need the divorce decree? I am thinking we need the divorce decree...

Just my opinion, but even if the divorce decree says what he is to pay her, it does not mean that he is paying her. If it is done thru state child support and taken from his check and directly deposited into her account or she gets the funds on a card, that would at least prove she is getting something. She could show you a statement proving that the funds are being deposited on a consistent basis. Husband may be writing letter just to help her to get the loan. (just saying)

I also think you need to know when it will end for your QM/ATR calculation.

I see what you are saying Sun Shine Lady, but be careful. There are ex-spouses who pay child support directly to the primary custodial parent (my ex-husband is one). Would discount my child support income because I don't make my ex-husband pay through the state?

You can use bank statements showing the deposits of the child support. Hopefully, the ex-husband is smart enough to write her a check or give her a money order with his name listed as the purchaser so he has a receipt. You can also use copies of those to prove the income.

A divorce decree, a copy of the parenting plan, or the child support award documents from the court are ideal though.

Thanks for the information Dani, you are one of the fortunate ones whose spouse chose to do the right thing.
Getting copies of checks or money orders would work also along with the other information you mentioned.
Because of some situations that I know of and have worked with, I would want something I could feel good about. Appreciate the information.

Thanks for everyone's input. The letter from the husband says that the amount will be significantly reduced in 4 years as one of the children turn 18. This is an 5 year ARM loan. How should this be handled and does this change how we are to look at ATR?

I would use Appendix Q as a guide.

A. Alimony, Child Support, and Maintenance Income Criteria. Alimony, child support, or maintenance income may be considered effective, if:
1. Payments are likely to be received consistently for the first three years of the mortgage;
2. The consumer provides the required documentation, which includes a copy of the:
i. Final divorce decree;
ii. Legal separation agreement;
iii. Court order; or
iv. Voluntary payment agreement; and
3. The consumer can provide acceptable evidence that payments have been received during the last 12 months, such as:
i. Cancelled checks;
ii. Deposit slips;
iii. Tax returns; or
iv. Court records.

Notes:

i. Periods less than 12 months may be acceptable, provided the creditor can adequately document the payer's ability and willingness to make timely payments.
ii. Child support may be "grossed up" under the same provisions as non-taxable income sources.

We've got a borrower who is newly separated, but the soon-to-be-ex is willing to write a letter stating that he will be paying $x per month in child support. They are not divorced yet, and the separation is so recent that there is not really any payment history to show. Any suggestions on how we can count this? We want to help her buy the new house. She's a small business owner with excellent payment history, but because her business is mostly cash she doesn't claim much income.

Has the IRS recently created some new exemptions that I'm unaware of?

I'm just the compliance flunky - I don't get to opine on what goes on between her, her accountant, and the IRS.

Well, now is the time she is going to have to pay the piper for under reporting, if what you have implied is correct. You've quite literally got no good way to document the anticipated child support income, and you can't use unreported (undocumented) business income. There's virtually no way you'll be able to create a QM out of these facts, and precious little chance you'll be able to document ATR.