Many people plan on buying a new home after they have left their marriage. They find the exact place to start their new life and begin the process of qualifying for a mortgage…only to find out they don’t qualify.
Going from a marital partnership to an independent life turns finances upside down. The uncertain times during negotiations often result in everything related to money being put on hold until the settlement has been drawn up and approved. This is where some people get in trouble.
Here are 4 things you must know while you are working things out with your spouse, or even before, to put you in the best position to acquire new debt when you are on your own.[1]
Fact #1. You need to protect your credit rating
Your credit rating is the number one factor in obtaining a mortgage or personal loan. According to Susan Kelly of Westborough Mortgage in 2020 you should have a rating of 640 or better for new mortgages, 680 for refinancing an existing mortgage.
Here is how you protect it or improve it.
Don’t close out credit card accounts that have your name on it. It may seem weird, but credit card companies look at your total available credit relative to your outstanding balance and it is preferable to have the card unused but available.
Don’t take on more debt. The credit card companies want you to have a balance under 30% of your available credit. So, if you have $10,000 in credit on a card get your balance below $3,000.
Don’t cosign on another person’s loan. Of course you want to help your children or other family members, but it will decrease your overall credit score.
If you must open another credit card do it a year before you think you will apply for a mortgage or other loan. That way the additional available credit will be counted.
Pay your bills on time, especially your mortgage and car loans. A late payment stays on your credit report for seven years.
Pay down your debt. It may make sense to even move funds from a retirement account as part of a divorce agreement to drop those balances down. You can avoid the penalty if it is a court ordered division of a 401(k) plan as part of a divorce.[2]
Fact #2. You must receive 6 months of support payments and be able to prove it.
Even though you have a settlement agreement approved by a judge that says you will receive income in the form of support payments that alone will not satisfy your potential lender. You will need a documented history of receiving those payments on-time for six months, otherwise they will not be included in your income.
The good news is that there is no rule that these payments can only begin after your settlement is finalized. You can begin receiving them early, even as you are negotiating your property settlement. So, if you intend to buy a property immediately after you are unmarried you may want to arrange to start receiving support early.
Fact #3. Your child support or alimony payments must last at least three more years.
Lenders will not just take your word for it that you are receiving support income. You need to show a signed memorandum of understanding or marital settlement agreement that clearly shows that child support payments will continue for a minimum of three years. Therefore, if you have older children who will soon reach the age of majority[3] the income will not be considered in your application. The same thing goes if your alimony payments will end in under three years,
Fact #4. The newly self-employed may need to wait to apply for a loan
Even if you have a high-income job as a self-employed person the lender will likely require two years of tax returns to substantiate your income.
Summary
There are lots of little strategies to follow to help set yourself up in your new life in great financial shape. Handling credit properly during your time of transition is one way, along with receiving income early and making sure your memorandum of understanding and settlement agreement reflects accurately what you will receive.
About the Author
J. A. Licciardello is a mediator and Certified Divorce Financial Analyst with Wentworth Divorce Consultants. He can be reached at 401 533-4142 or via email at wentworthplanning@gmail.com.
He is the author of “The Financially Smart Divorce” available on Amazon.
[1] Many thanks to Susan Kelly Senior Loan Officer of Fairway Mortgage in Westborough Massachusetts for her help in writing this post.
[2] Read my article on “A Tax Loophole for Divorcing Couples” by clicking here or going to https://www.wentworthdivorceconsultants.com/articles/one-huge-tax-loophole-just-for-divorcing-people
[3] In some states such as Massachusetts child support may continue until the child reaches age 23 if they are enrolled full time in a four-year university or college.