If you’ve been through a divorce, a fresh start can come with additional matters to consider if you’re trying to buy a house or refinance your current mortgage. Let’s discuss re-entering the mortgage market after a divorce.
When it comes to your source of income, if you were a two-income family, losing your spouse’s income means you’ll likely qualify for a lower amount you can borrow than before 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), which can help you qualify to borrow more. Your DTI measures what percentage of your monthly income goes to paying off debts like homes, cars and credit cards.
Under certain loan options, your lender will be able to 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 ultimately 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.
Sometimes getting a divorce can be expensive. Every situation is different, but it’s not uncommon for the amount of cash you have on hand to be lacking for a while. With that in mind, be aware of some of the assets you need on hand in order to get a mortgage.
The majority of 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 being able to pay for the down payment, you’ll also need this cash on hand as well as enough funds to set up an escrow account. Most loans require that you set up an escrow account rather than paying for taxes and insurance separately.
If your credit score is better than your ex-spouse’s, you could benefit if you’re now going to buy a home solely in your name instead of having the other person’s 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 (and it will keep you from accruing interest charges) while building your credit history. You may even be able to rack up rewards points. Once you’ve established a history of paying your bills on time over a few different accounts, you’ll have a better chance of getting a loan approval.
Re-Qualifying for Your Existing Mortgage
If both of you are on the mortgage for your home and one of you needs to be taken off, you’ll need to re-qualify 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.
If you’re refinancing your mortgage, your spouse may be entitled to be paid a consideration amount for their interest in the property. It’s best to discuss all your options with a lawyer.
Removing Your Ex from the Title
If you’re refinancing your mortgage to remove your ex-spouse from it, you may also want to remove them from the house title. This removes 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.
Are you ready to buy or refinance on your own? Get your mortgage started here. If you still have questions, we can answer them below.
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