Often times in the case of a separation or divorce, one of the main topics of discussion will be what are we going to do with the house, and where will I live after? Will you buy a new home or rent? As a mortgage lender we often see people putting the cart before the horse. This means looking for a new home or selling the old one before determining what you can borrow to buy the next home. It is important to get your ducks in a row with your finances. That includes researching your borrowing ability so you can determine if buying a new home or refinancing the current home is feasible and in your best interest.
A mortgage lender’s primary concern, other than the real estate collateral (the house) you will be using to borrow the money, is your ability to repay. Some will chuckle and say that it doesn’t seem that lenders look into your ability to repay lately, as evidenced by the short sale and foreclosure crisis that struck our country. It is important to know that ability to repay was always supposed to be a major part of being a homeowner, and now after the lending issues, underwriting a mortgage loan is as scrutinizing as ever. What does this mean for someone going through a separation or divorce?
To determine your ability to repay, the lender will compare your gross monthly income to the monthly liabilities you will have. Paying child support and alimony are considered debts to the lender. Receiving child support or alimony may be considered income, but lenders want to see the income received consistently for a minimum of three months, and sometimes up to one year. This is often a conflict and needs to be planned for since the potential homebuyer might be trying to buy the home prior to the lender giving them credit for the income. If the income is needed for qualifying, it can cause your loan to be turned down if it is too early, or cause you to wait months before you can get financing. If you are receiving income, and need it for qualifying, it is also important that the income will continue for at least three years.
Lenders require a property settlement agreement or divorce decree to document that you may receive income. They also use this to document if you are required to pay out alimony or child support. Whether receiving income, or paying out, the legal agreement is important and must be reviewed by the lender prior to being approved for a loan.
Often times when couples split, money is doled out in a lump sum as opposed to a monthly payment structure. While the borrower may have plenty of assets for down payment and reserves, remember that lenders are really comparing the income to the monthly debt payments. Assets, while nice to have in the bank, do not help much when trying to qualify for a conventional loan. If there is no stream of income in the form of support payments, the buyer may or may not qualify.
Most of the complications I see arise when buying a home post separation or divorce can be remedied with proper planning between your mortgage advisor, financial planner, divorce attorney, and a real estate agent that understands your goals and objectives. The moral of the story is to plan ahead and meet with the necessary professionals. It is important to have a great team on your side. This will ensure success and efficiency in what otherwise can be a trying time. Vice President, Home Savings & Trust Mortgage www.pcunninghamhomeloans.com
Planning for your after-divorce life is so important, and so difficult. Difficult because you have every emotion known to man constantly revolving in your head. This makes it ultimately important that you surround yourself with professionals who may lend you factual advice as opposed to emotional advice from friends, family, etc. They are no less well-meaning; they care about you.
Preparing to purchase a new residence AFTER divorce should be kept in mind DURING the divorce; as difficult as it is (p.s.—this is one of those “easier said than done” items).
Remember: if children are involved, make your decisions based on what will be best for them in the short-term and long-term; not on your desire to make the other spouse pay; in the long run, it just isn’t worth the price.