Divorce can be a complicated, burdensome process. Mistakes are bound to happen.
However, not all mistakes are created equal! Divorce mortgage mistakes can have everlasting consequences.
These are the top 10 mortgage mistakes to avoid when going through a divorce.
Waiting until the end of your divorce to get preapproved
There are already enough surprises that can pop-up following your divorce settlement. Finding out whether you do (or don’t) qualify for a mortgage shouldn’t be one of them…
You should attempt to negotiate what will happen to the house early-on, if possible, and then go about the business of prequalification. It’s highly likely that qualifying for a new mortgage on your own is going to be harder than it would have been together. Therefore, it’s best to spot any problems early on allowing you to make other plans if you hit a roadblock.
Not obtaining a preapproval letter for a post-divorce home purchase
A pre-approval letter lets buyers know you have taken the first step of becoming a legitimate buyer. In many cases, agents will want a pre-approval letter before they even start showing you properties. It separates you from the lookie-loos and may give you an advantage if there’s a hot property with several interested parties.
A preapproval is more formal than a prequalification and involves a credit check and review of financial documents, so be prepared to do some work to complete this task.
Financing a property too soon, or too late in the divorce process
If you rush into a deal, you could wind put yourself at a negotiating disadvantage with your spouse because you’ll need cash or assets out of a settlement agreement. If you wait until late in the process and your financing hits a snag, you could be left without the home that you want to buy.
In addition, if you anticipate that you’re going to take some hits on your credit, either due to an uncooperative spouse or for other reasons, you should factor that in as well. You need to understand the timing considerations and apply them to your own specific situation to maximize your financing options.
Not maintaining bill payments (and damaging your credit)
Qualifying for a mortgage after a divorce is hard enough, but if you want to torpedo your chances and become a renter for the time being, simply neglect to pay your existing obligations on time.
Every 30-day late or worse is a negative ding on your credit score. It could also take several years to recover and repair your credit score, depending on the number and severity of your delinquencies.
Rushing to transfer title too quickly
Once the deed to a home has been executed to remove you or your ex-spouse, the same change will be made to the title of the property once that deed is recorded. This will officially absolve you or your spouse of all rights to the property.
Keep in mind that filing a deed does not relieve a person of their obligation to the mortgage. Coming off of title to the property does not remove that person from the mortgage. If you are the spouse that is relinquishing your ownership in the home, you should wait for the mortgage to be refinanced out of your name before you agree to sign over the title.
Trying to make decisions on your own
When you have a pain in your gut, you generally don’t decide that you need to have surgery or have your appendix taken out on your own. You seek professional help for that kind of major life decision. And that’s exactly what you need to do when making decisions about how to best purchase (or refinance) a house, especially coming out of a divorce.
You need to work with a lender, a mortgage advisor who specializes in divorce situations, a CPA, a divorce financial planner or others who can guide you through these major post-divorce financial decisions.
This is especially important when working with a mortgage professional. This person should have a full grasp on the divorce legal process, and its implications on your ability to secure a loan.
A mortgage professional that specializes in divorce is known as a Certified Divorce Lending Professional or CDLP.
Not understanding the tax considerations
Tax consequences can impact many areas of your divorce, and there’s no exception when it comes to buying and selling the family home. You need to be very clear on how interest deductions, capital gains, and other related issues can affect your finances.
Also be aware that if a tax advisor has represented both you and your spouse in the past, they should only represent one of you going forward to avoid a conflict of interest.
Selling or moving out of a marital home will impact the important tax shelters of mortgage interest and real estate taxes. If one spouse buys the other out, they will have the benefit of keeping these shelters in place. But if you are the seller, you will lose these benefits if you don’t buy another property.
Wasting time trying to assume your current mortgage
There’s a good chance you might be in denial when it comes to your family home because of the emotional attachments you will have to it. Lenders don’t care about those attachments. For them, it is a business transaction.
They only want to know that if you attempt to assume your existing mortgage that you’ll be able to make the payments and keep up with the loan in your new station in life. It’s hard to do, but if you and your experts run the numbers and it just doesn’t pencil out, you’ve got to sell the home and move on. Playing the “what if” or the “wishing” game is only going to hurt you in the long run.
Borrowing more money than you can truly afford.
On paper, you can afford it, but in reality, you know that you could wind up house rich and cash poor.
Again, this is as much of an emotional decision for you as it is a business decision for a lender.
Just because a lender qualifies you for a large mortgage, doesn’t necessarily mean you can afford it. Being able to afford it doesn’t just take into consideration your cash-flow now, but also accounts for a worst-case scenario in the face of emergency situations or unforeseen circumstances.
Not being forthcoming with your mortgage advisor.
If you’re not honest with your advisor, then you’re going to be given bad advice based on your situation. Your mortgage advisor should work for you – not the bank.
In other words, lay it all on the table for them. Let the professionals determine which bits of information are material and need to be disclosed, and which bits of information are inconsequential and should remain separate from your loan application.
The best person should be a buffer between you and the lender and position you in the best light possible when you apply for financing.
We hope this helps!
Please let us know if we left off any important mortgage mistakes that should be brought to light.
Leave us a comment below. Let us know the challenges you’re facing – and we’ll help you find a solution!