Tips to Buying a Home While Going Through a DivorceWhether you’ve been through a separation or divorce or know someone that has, it is very tough emotionally, and the last thing anyone needs to worry about is more problems with living arrangements and financing. Yet this is a common cause for concern for most people going through the divorce process. The good news is that it is a solvable challenge when you have the right professionals by your side.
One of the first questions may be what to do with the marital property, or how to make the transition to another home easier.
Your options will depend on the amount of equity in the spousal home, how it was purchased and titled, whether or not either party desires to remain in the home, the divorce settlement, and the credit scores of both parties.
Two of the most common solutions are to refinance the mortgage to remove one parties interest and liabilities or sell the home. Always refer to your attorney or legal counsel before making any decisions.
Refinance the Mortgage
If one party will be remaining in the marital home, it is common to refinance the mortgage to remove the ex-spouses name from the mortgage and the title, therefore removing any liability or ownership that they have in the home. This allows the person who is staying in the home to remain on the mortgage and continue to make the monthly payments.
A cash-out refinance could also be used to pay off a portion of the equity to the spouse moving out of the home, if necessary. To do this, the home must have a decent amount of equity to pull from.
To refinance to home into one party’s name, that party must have the income to pay the monthly mortgage on their own or must have a co-signer on the loan who will agree to assume the responsibility of the loan if the occupant cannot make the monthly payment. It is not uncommon for family members to co-sign on the mortgage.
To refinance a home, you must also have an acceptable credit score. To check your credit report for free once a year, visit www.annualcreditreport.com.
Sell the Home
Another common option, especially when neither party can afford to keep the home, is to put the home on the market and try to get the best possible price for it.
How the profits will be split will vary depending on your personal situation and any mutual agreement that has been put in place by your attorneys. This is often a huge focus during divorce proceedings because, for most couples, a home is their largest asset.
Hopefully the sale of the home ends with money to start over for both parties.
Things to consider when going through the financing (or refinancing) process after a mortgage:
Purchasing a home after a divorce can require additional documentation, which may slow down the process. Keep this in mind when you start your home search. Always speak with qualified loan officer before searching for homes so that you can understand how much you might be able to qualify to borrow after your divorce.
It is also important to have a legal agreement in place before starting the process.
Lenders like agreements that are formal, written and court-ordered. Often, those agreements are the only way lenders can demonstrate good risk decisions and borrower stability with regard to assets, income and liability in order to approve a loan. If agreements are not formalized or court ordered, then the lender may not be able to proceed with the loan. This is of course dependent on your unique situation.
Here is an example of why it is important to have a formal agreement:
If a formal agreement exists that says spouse A is responsible for the house payment, even though Spouse B is still on the note, the lender does not have to count that payment against Spouse B because the agreement is court-ordered. If it is not court-ordered, then the lender must count the house payment against Spouse B. Unfortunately, there are not a lot of people that can qualify with two mortgage payments!
A formal, court ordered agreement is also important for lenders when considering child support or alimony.
In many cases, a party who receives court-ordered alimony or child support can use it as a source of income when qualifying for a home, however each loan program will have different rules on how this income is treated.
For instance, if you can only show that you have received 3 months of child support or alimony, then your only options are FHA or VA. However, if you have received alimony or child support for 6 months or more, then your options open up to Conventional loan options.
Lenders must also document the receipt of the income, which can be tough if the payments are paid in cash or are paid sporadically. It is best to speak to counsel prior to applying for a loan to ensure that your child support or alimony payments can be considered as a source of income, as this can make a huge difference in whether or not you qualify for a loan.
On the flip side, if you are paying court-ordered child support or alimony and are applying for a loan, this will be considered a liability and will count toward your debt-to-income ratio, an important factor that lenders use to assess the client’s ability to pay back the loan.
It is important to review all your debts and assets carefully before starting the mortgage application process so that you know where you stand financially.
You should also be monitoring your credit throughout the entire process to ensure that you are keeping up with your debts and making payments on time. In some circumstances, your credit make take a hit during the separation/divorce as debts and payments are being sorted out and agreements are being made by both parties.
Keeping up with your regular payments both during and after the divorce is critical to keeping your credit score healthy- yet it is not always possible. Some loan programs might allow for “extenuating circumstances” due to a “life event,” where the lender takes a closer look at the credit issues to determine if they resulted because of the divorce but have since been sorted out.
Speak with a loan officer about your credit and how you might be able to work around it. In some instances, it just might take some time to rebuild your credit by paying down debts and making payments on time.
A divorce is a hard process, and it can be financially and emotionally challenging. Take the time to think over your options before moving forward with a home purchase. It is important that you are ready to take on the responsibilities of homeownership again before entering into such a large agreement. No matter what you decide, it is important to have the right professionals by your side.
Always speak with your attorney, loan officer and real estate agent to get solid advice that pertains to your personal situation.
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