• ktidwell

5 Things to Consider Before Applying for a Mortgage after Divorce

As you navigate the divorce process, one of the most critical decisions will be where to live going forward. Many assume if they have enough income to cover the monthly payment, there will be no difficulties qualifying for a mortgage. Unfortunately, post-divorce mortgages can be a bit tricky. Knowing what to expect in advance of finalizing your divorce settlement may help you structure your agreement in such a way to save yourself from a lot of disappointment down the road.

Of course, different lenders may follow different guidelines, but more often than not you can expect them to consider the following:

1. Timing of Alimony/Child Support Payments

To be included as part of your income for mortgage qualification purposes, there are some general requirements:

  1. Any support payments should have been received for six months and required by a court order prior to applying.

  2. Any support payments need to continue for three years after the time you begin payments.

  3. If these payments are your child support payments, the settlement agreement needs to designate a specific end date if you want them to be considered after your children turn 18.

2. Check your Credit

Your credit is the first thing lenders look at when you apply for a mortgage. Many trusted sites offer free credit reports so you can know where you stand.

Some divorcees have no credit because everything was in their spouse’s name. This is called a “thin credit profile” and can hinder your ability to secure a mortgage. Others have damaged credit because a vindictive spouse ruined your credit as punishment for the divorce.

Either way, with a little extra effort, there are repairs that can be made. Whether you need to dispute inaccurate information, bring late payments current, settle past due amounts, or take care of collections, the earlier you improve your credit, the higher your chances of approval.

3. Look at your Debt & Income Balance

Living on one income means everything is on your shoulders. Most lenders allow a debt-to-income ratio of up to 43% for a mortgage. This means your total debts including the new mortgage and any existing debts shouldn’t take up more than 43% of your gross monthly income (i.e. income before taxes).

Lenders also prefer stable income they can trace back over the last 2 years. If you just started working, a letter of explanation may help your case as long as your debt to income is manageable.

4. What Assets should be Used for a Down Payment?

If a 401k retirement account was the main asset you and your spouse had to split, there is a chance that you can take a one-time, penalty free distribution to fund a down payment on a house. This would need to occur at the time you file your QDRO. There will still be taxes to pay, but if the plan document allows, you will get to save on the early withdrawal penalty for those under age 59 ½.

Unfortunately, this exception does not apply to IRA's.

5. Getting your Name Off any Debts that aren’t Yours

If your name remains on debts that don’t belong to you, it can hurt both your credit score and your debt-to-income ratio. For example, if your name is on the mortgage but your spouse was awarded the house, he/she needs to refinance the house in his/her own name and quitclaim your name off the title.

If there are other debts in your name being reported to the credit bureaus but you have proof they don’t belong to you, write a dispute letter, and provide them with your divorce decree to prove it.

Getting a mortgage after divorce may take a little more time and energy, but it can be done. With the right guidance from your divorce team, you can work toward getting the mortgage you need to begin your fresh start in life.