Getting a mortgage can be more challenging after a divorce, but it is possible with the right roadmap in place. Here are 9 simple steps that can help you reach that goal.
#1 – Review your credit
While you’re in the midst of a divorce, you may be reacting to conditions in the short-term at the expense of thinking about long-term planning. But if your goal is to buy out your spouse from your current home or put yourself in a position to buy another property, you must pay attention to what creditors are seeing even in the thick of other things.
This means you must review your credit as early as possible and continue to monitor it as you work through your divorce. Just because a spouse says they’re going to handle credit or debt-related matters, doesn’t mean they will actually follow through.
In fact, some vindictive spouses may actively seek to ruin your credit as a way of punishing you.
The best way to prevent that is to be on guard by keeping a close eye on your finances.
You can get a free copy of your credit report through www.AnnualCreditReport.com, or you can purchase copies through any of the three major credit reporting agencies as well.
Although there are smaller and more specialized agencies, when creditors and lenders review your credit, they will do so with Equifax, Experian, and TransUnion. These three agencies retain information on more than 200 million Americans. The Fair Credit Reporting Act (FCRA) regulates how these and other credit bureaus must operate because they handle so much sensitive information.
Reviewing your credit history and your current credit score will give you the information you need to improve any deficiencies or dispute anything that is inaccurate.
Also, by law, you can get a copy of your report at no charge if you have been turned down for credit, as long as you do it within 60 days of being declined.
To dispute or explain listings in your credit file, you can also send a written explanation of up to 100 words to credit bureaus and ask that it be attached to your credit history. For example, you may want to add a notation that explains you were dealing with an irresponsible spouse who racked up a lot of debt prior to getting a divorce. This will not raise your score but will help future lenders understand why there may be blemishes on your profile.
#2 – Get a mortgage preapproval letter
A preapproval letter will indicate to your spouse, your attorney, the mediator and/or the judge, that you are in-fact able to secure a new loan.
If you have a property settlement agreement as part of your final decree, a lender will want to see it. Why? Because it can have an impact on your debt-to-ratio income. If the property is in your spouse’s name, a lender will want to know that too, so they can better understand what debts are associated with your personal finances.
If you don’t have a final divorce settlement agreement in place, you can still obtain a preapproval letter under the condition that the divorce agreement gets signed and includes particular stipulations.
If you are getting or paying spousal support and child support, this will also affect your ability to get a mortgage and it must be disclosed.
Also, understand the difference between getting pre-qualified and pre-approved. Pre-qualification simply gives you an idea of how much of a loan you can qualify for and the process is much less involved than pre-approval.
Pre-approval is a much more formal step that involves submitting full documentation to the lender, resulting in a conditional commitment to actually grant you a mortgage.
Another way to look at it is that pre-qualification involves the consumer submitting their data and records for review. Pre-approval is the process of verifying data through a credit check and other means.
Pre-qualification is a good indicator of loan worthiness, but pre-approval is much more exacting and definitive.
Pre-approval will result in the lender issuing a conditional commitment for an exact loan amount and this can give you a distinct advantage when shopping for a home and dealing with a seller, or negotiating a buyout of your spouse’s interest.
#3 – Understand any timing constraints
The time of which you finalize your divorce will have a direct impact on your ability to apply for a mortgage. Most lenders will want to see a temporary settlement or better yet, that a final settlement is in place before considering a new mortgage application.
However, this isn’t always the case. There are plenty of opportunities to refinance a property pre-divorce, or pre-settlement, and you should talk with your divorce mortgage advisor to learn the nuances related to your specific situation.
By pursuing a preapproval early on in the divorce settlement process, you’ll quickly understand when the best time to apply for the mortgage will be. You’ll learn what must happen in order for your loan application to become formally approved, and you’ll be able to focus on the things that matter at the right times.
# 4 – Finalize your divorce settlement agreement
Until you have a final settlement in hand, there is always the potential that your finances could blow up, thus altering the terms of any financing you may be seeking.
Here are 3 examples of common financing solutions that may require a finalized divorce settlement agreement prior to completion:
Assumption of a loan takes place when one spouse is staying in the property and wants to assume the existing mortgage. This means all responsibility is transferred over to them and they will need to prove to the lender that they are financially capable of handling the loan on their own.
Refinancing is more often the case when one party stays in the home. This is more involved and requires a single spouse to go through the entire financing process on their own, without the benefit of a spouse’s income or assets. Refinancing is also often used to pull money out of a home to pay off the other spouse’s interest.
Sale of the home. This is the cleanest break for a divorcing couple. Both sides sell their interests in the home and each uses proceeds as they see fit. This can generate a sizable down payment amount for a spouse looking to get approved for another mortgage. The amount of the down payment can also impact what terms are ultimately offered by a lender. However, you may be barred from selling the home until you have a settlement agreement in place.
Unless otherwise agreed upon, both spouses will still be responsible for mortgage payments on a joint mortgage obligation. The only way to exclude this debt from one of the spouse’s mortgage application is to finish the divorce and assign the debt to one particular spouse.
In the absence of such an agreement, any joint debt is likely to count against you.
#5 – Split your assets
Your final divorce decree will spell out exactly what assets each of you will receive.
Splitting assets can be a bit tricky. Before splitting assets, it needs to be determined which assets are marital/community property and which assets are separate property. In general, assets owned or acquired before marriage or after the date of separation are considered separate. Assets acquired during the marriage are generally considered community property.
There are exceptions to community property rules such as if an asset was inherited or was a gift to only one of the spouses. Rules vary by state and by the situation, so be aware it is not a simple cut and dried process regarding property division.
The other factor to consider is that some states are community property states and others are equitable distribution states. This can have a big impact on how assets are divided. In a community property state (there are currently nine of them), assets are split evenly, right down the middle, the vast majority of the time.
In an equitable distribution state, assets are divided equitably, but not always on a 50/50 basis. Courts look at what is fair, taking a number of factors into consideration. State laws differ and it’s best to take a closer look at your asset division laws for a much clearer understanding of what to expect.
One other issue that does crop up is that some spouses will attempt to hide assets in a divorce. It’s flat-out illegal to do this, but it does happen. This could deprive you of the reserves you’ll need to qualify for a mortgage or meet your downpayment requirements. If you suspect this is the case, you need to take legal actions to protect your interests.
Keep in mind that in addition to assets, you will also be splitting debts too. In some cases, divorcing couples can agree on who is responsible for which debts. In other cases, a court may be the entity that ultimately decides who is responsible.
Also note that until you legally take steps to divide debts, you are responsible for those debts and if payments are not kept current, your credit score will suffer.
#6 – Transfer title to yourself (if keeping the home)
Until the title of a home is officially transferred from one spouse to another, both spouses are still legally ‘owners of record’. This can create problems if you’re the one keeping the home.
The easiest way to release an interest is through a quitclaim deed. It’s exactly what it sounds like. You are quitting your interest in the ownership of the home. You will need to do it through your county recorder’s office, or through a deed prepared by your attorney.
Here’s where people go wrong: Your mortgage liability is not transferred through a quitclaim deed.
Whichever spouse gives up their interest in the home could still find themselves responsible for half of that property’s mortgage debt and any lien on the property. You will need to work with the lender to remove your financial obligations to the property IN ADDITION to transferring the title.
These are two separate steps of the property division process pertaining to real estate.
When you transfer the title of the property with a quitclaim deed, you may be hit up with a transfer tax for both you and your spouse. This amount varies by county but is usually 1% of the home’s purchase price.
Also, when a property is transferred, a county could also reassess the value of the property. This means the spouse taking possession would have to pay higher property taxes on a higher assessed value.
It should be noted that a refinance does NOT trigger a property tax reassessment. However, that’s not to say that your property will never be reassessed. If it was, it wouldn’t be a result of the refinance.
#7 – Retire and refinance joint debts
You need to be proactive when it comes to protecting your credit profile. An irresponsible or malicious spouse can torpedo your attempts to get a mortgage or to take other steps when attempting to rebuild your life after a divorce.
The smartest thing you can do is to take the ball out of their hands and retire all joint debts as soon as possible. Pay them off or put a freeze on accounts until you’re able to do so.
As long as your name is on an account, whether it’s a mortgage, credit card, car loan or some other instrument, you are legally liable for that debt.
Lenders probably won’t even know you’ve gotten a divorce until you tell them. And even when you do, they are generally not too sympathetic to your personal plight. If you don’t remain current, no matter what the situation, you will get dinged for it.
A well-intentioned spouse who says they will keep up with their part of the agreement isn’t someone you can blindly trust either. Assume the opposite to protect yourself. Monitor when payments are due. Double check to make sure they are being made. Make payments yourself if needed, and look to recoup the cost later.
Also keep in mind that even if a spouse is cooperative, they could become incapacitated or die, leaving you holding the financial ball all on your own. You might have disability insurance or life insurance to get you through. But then again, you might not.
You are going to need as few blemishes as possible going forward and removing the variable of a spouse who may or may not cooperate when it comes to joint debts is one thing you don’t need to gamble on.
#8 – Choose a mortgage lender
There are some lenders who do not want the extra work that is required in helping a recently divorced person secure a new mortgage. These types of loans can be complex, contentious, and a downright battle.
There are a number of unknowns that can crop up and make lenders skittish about committing at a time in a person’s life when future finances may be difficult to predict with enough certainty.
As you can gather by now, there are a multitude of special situations to consider that may or may not impact your ability to get approved for a mortgage after divorce. Normal lenders may understand many of these nuances but may not be fully equipped to solve your unique problems.
If this is the case, your best option may be to retain a divorce mortgage advisor (DMA). DMA’s work for individual clients and not for lenders.
They also do not charge an applicant any fees. They are paid by the lender that originates your mortgage. You are also not required to pay any of those fees upfront as well. All third-party fees are paid at closing after you agree to the terms of your mortgage.
A divorce mortgage advisor does not work with any one particular lender. As a full-service brokerage, the DMA will shop around on your behalf. Their goal is to match you with the best available lender and rate for your given set of circumstances.
This can save you a lot of time because you’ll only need to go through the same application process once, instead of over and over again if you apply with various lenders.
#9 – Lock in a low interest rate
Getting the best interest rate that you can is a bit of an art form. There are a few variables to consider such as your creditworthiness and so forth.
Interest rates move up or down with the current market conditions until you decide to lock in at a current rate. Once you do so, your rate will be protected for 30 to 60 days, depending on how much time you need to complete the mortgage process. The rate lock allows you to eliminate one more variable and zero in on exactly what your costs are going to be.
Because a divorce mortgage advisor works for an individual client and not a bank, part of that commitment is to find the best available rate on the market. It takes the burden of rate shopping out of a client’s hands and allows a professional to leverage the expertise and industry knowledge that a DMA can tap into because they are involved on a daily basis.
You can also get a lower interest rate by paying discount point(s) up-front. By essentially paying part of your interest up front, you will be able to lower your monthly payment over the life of the loan. Discount points are always equal to 1% of the loan amount. For example, one point on a $500,000 loan would require a person to pay $5,000 additional upfront.
There is no requirement to pay discount points, but most experts agree that the longer you plan on staying in the property you are buying, the more advantageous it is to pay one or more discount points up front.
The other variable to consider is if you want a lender to issue a credit for closing costs, you will also have to accept a higher interest rate. Essentially, closing costs will be folded into the loan unless you want to pay closing costs upfront.
In all cases, it pays to run various scenarios to understand what your options are going to be before committing to specific terms and conditions.