How To Buy A House After A Divorce

If you’ve been through a divorce, a fresh start comes with new matters to consider when buying a house or refinancing your mortgage. Your former partner may buy out your portion of your current home, meaning you'll be looking for your own home, or you may stay in your current home, needing to refinance.

Either way, you're looking at a new mortgage. Let’s discuss reentering the mortgage market after a divorce.

When divorcing, a lot of change is happening. You may be separating from your spouse's name. The split could be amicable, but it also could be complicated. Depending on your divorce settlement, you may be looking for a new home.

Fortunately, you're not alone. Divorces happen every day. The mortgage and real estate industries know this. Work with a REALTOR® or a real estate agent who understands your experience and your needs when it comes to a new home.

Income

When it comes to your source of income, if you were a two-income family, losing your spouse’s income means you’ll qualify for a lower loan amount, unless you’re buying with a cosigner or a new significant other.

There are ways to offset this. For example, if you’re receiving child support and/or alimony (and you can document that these payments will continue for some time), these can be factored into your earnings for the purposes of qualification.

Conversely, if you’re now paying spousal or child support but it will be ending soon (and you can document that), you can have the payments excluded from your debt-to-income ratio (DTI). This may qualify you to borrow more. Your DTI measures what percentage of your monthly income goes to paying off debts like mortgage loans, cars and credit cards.

Under certain loan options, your lender can choose whether to count your child support or alimony payments, either as a debt payment or as a reduction of income. If they’re counted as a reduction of income, this could help you keep your DTI down.

Once you’ve calculated your income, you can then determine whether buying a house is right for you. If it is, to have the best chance of qualifying for a mortgage, keep your debt payments to less than 43% of your before-tax income.

Assets

Getting a divorce can be expensive. Every situation is different, but it’s not uncommon for cash you have on hand to dwindle, especially if you have to hire a divorce attorney. With that in mind, be aware of some of the assets you need on hand to get a mortgage.

Most loan programs require that you have a certain amount of money in reserves. The exact amount of cash reserves you need depends on the loan program, but a good guideline is two months’ worth of principal, interest, taxes and insurance costs. 

So, in addition to having the down payment, you’ll need cash on hand and enough funds to set up an escrow account. Most loans require you to set up an escrow account rather than paying taxes and insurance separately.

Credit

If your credit score is better than your ex-spouse’s, you could benefit from buying a home solely in your name. You won't have their bad credit dragging you down.

If you’re establishing credit for the first time on your own, a good game plan is to get a credit card or two, use them and pay them off in full every month. Treating the credit card like a debit card will help keep you from buying more than you can afford. 

Remember that carrying a balance on a credit card means you’ll accrue interest charges and it will negatively affect your DTI. Your goal here is to build a credit history. You don't want to take on more debt.

Once you’ve established a history of paying your bills on time over a few different accounts, your credit score will go up. With a better score, you'll have a better chance of getting loan approval.

Getting Off Your Old Mortgage

If you want off your old mortgage, there are two ways to do it: release and refinance.

Most lenders will release an ex-spouse from a mortgage when presented with the right documentation. If you submit a divorce decree and a quitclaim deed to your lender, they will likely remove your name, leaving the house in the name of your ex-spouse.

The other option is for your ex-spouse to refinance after the divorce. This process will pay off the old mortgage and start a new mortgage in the name of your ex-spouse only. Refinancing requires paying closing costs, and it may not be financially viable for your ex-spouse, depending on their credit and the market.

Whether it's a release or a refinance, this should be worked out in the divorce decree. If your ex-spouse is being contentious and uncooperative, a divorce attorney and divorce proceedings will be necessary to work out the mortgage.

Divorce causes so much change to happen in your life. Maybe you want to limit it by staying in your current home. You may find some stability this way, especially if you have kids.

Whether you can stay in your home depends a lot on your financial situation. If your ex-spouse contributed to the family's income, you’d have to evaluate whether you can afford to pay the mortgage. Maybe you can make the mortgage payments, but your quality of life will shift. 

These are all financial decisions to account for when you're deciding to stay in your current home. 

Refinancing Your Mortgage

Depending on the market situation, refinancing your mortgage may be a good option. If interest rates are low and you have good credit, refinancing your mortgage could help you save money.

If you’re refinancing your mortgage, your spouse may be entitled to be paid an amount for their equity in the property. It’s best to discuss all your options with a lawyer.

Requalifying For Your Existing Mortgage

If both of you are on the mortgage and one of you needs to be taken off, you’ll need to requalify for the loan using the income, assets and credit of just one person. This way, the mortgage lender knows you can still afford the payments on your own.

Removing Your Ex From The Title

If you’re refinancing your mortgage to remove your ex-spouse, you may also want to get their name off the house title. This takes away their rights to the property. 

You do this with a quitclaim deed. If you haven’t yet finalized your divorce, consider making signing the quitclaim deed a condition of your divorce decree, in order to receive the signature in a timely fashion.

The other option that may arise when divorcing is selling your current home. In this action, both you and your ex-spouse come to an agreement on how to split up the money from the sale, as well as the work put into the sale. The outcome should be outlined in your divorce decree.

If you're going to sell your current home, connect with a real estate agent who understands the situation. Your divorce attorney may be able to contact you with an agent who specializes in selling homes with divorcing couples. Some agents go as far as to become Certified Real Estate Divorce Specialists.

Tax Implications

Selling your home or buying out your ex-spouse's share means you'll be affected by taxes. If you profit on the sale of your home, you may be subject to capital gains tax. This comes into play whenever you sell your home for more than what you paid for it. 

However, there are exemptions that may get you out of paying the tax. If you and your ex-spouse lived at the house 2 of the 5 years before the sale, the home is your primary residence (not a vacation or investment property) and you're profiting less than $500,000 jointly, you're not subject to capital gains.

If you don't meet all these exceptions, you will be paying some form of capital gains tax for the sale. Either way, you should consult a tax professional to avoid any unexpected tax bills.

Home Equity

One huge factor in deciding whether to sell is your home equity. Home equity is the portion of the mortgage you've paid off. If your home is worth $250,000 and you still owe $150,000 on your mortgage, that means you have $100,000 in equity. 

When you sell your home, the equity is what the owners get to keep, minus closing costs. You will need to agree on an appraisal company with your ex-spouse. You will need to also consider other costs of selling, like the cost to make repairs and stage tours.

Real estate is one of the biggest investments couples make together. When a couple divorces, this investment needs to be settled. Whether your ex-spouse stays in the home, you stay in the home or you sell it and split the money, you must go through the process. As difficult as divorce can be, it’s something many people have been through.

Evaluate where your personal finances stand, along with your personal feelings. Are you eager to leave behind your marital home or would you prefer the stability of staying put? Without your ex-spouse, do you have the income to make the monthly payments? Or would downsizing to a new home make more sense?

No matter what you decide, it’s important to have the right people in your corner. A good divorce attorney, if necessary, will help you untie complications. If you're selling the home, a REALTOR® or real estate agent who specializes in selling for divorcing couples could help streamline the process.

Remember that the decisions you make today lay the groundwork for tomorrow. Divorce is hard, but you'll get through it one step at a time.