Qualifying for a Mortgage After Divorce
In the second of two articles, guest blogger, Tom Wells, licensed mortgage originator, highlights key considerations divorcing individuals need to know about qualifying for a mortgage after divorce:
Qualifying for a New Mortgage. More than a few complications can arise from a refinance in connection with a divorce situation. Your mortgage lender will have to ensure that the newly single person, with just their own income, can be approved to carry the mortgage along with their debt load (and along with their potentially newly-bruised credit). Speak with a mortgage professional to see what kinds of loans are out there to suit your specific needs and also talk to them about DTI (“debt-to-income” ratio) and see where your DTI is projected to be after the divorce.
This type of consultation is often a free service, costing nothing but some time and patience. If you are hesitant to start the mortgage process and simply want to use a quick rule of thumb to determine if you might qualify for a mortgage on your own income after the divorce, here’s a tip: use the 45% mark as your maximum DTI. Here’s how to informally calculate your DTI ratio:
Your Debts. To do this, calculate all of your minimum monthly bills that are on your credit report. (Don’t count the cable bill or your utilities.) Don’t forget to include your home insurance and property taxes if they are not already included in your mortgage payment. (More often than not, you will already have an escrow account for taxes and insurance – but if you don’t, you’ll need to factor the real property tax and insurance costs in on your own.)
Your Income. In performing your own quick calculation, to figure what your post-divorce income is, use your own gross monthly income (before taxes are taken out) but remember to subtract any alimony or child support if that is a new deduction for you. If your income will be insufficient, you always have the option to use a co-borrower (friend or family member) if need-be, just keep in mind that the co-borrower’s credit and DTI ratio will be factored in as well --and that the co-borrower may potentially request a stake in your property. (It is it not uncommon for the co-borrower to request that their name also appears on the property’s title.)
Cash Out Considerations. If you will be taking cash out of your home, you can typically take out up to 80% of the appraised value of the property. (This percentage can vary with certain other options.) You can use the online websites (Zillow or Realtor.com) to obtain a rough ballpark figure for your property’s value, but you typically should try to estimate your home’s value conservatively – to avoid surprises when the actual mortgage appraisal comes back. There is a “science” to the appraisal process, but there also is some ambiguity and variability between appraisers (Xome.com is also a good free resource for estimating a value as it gives you a “confidence score” and a range.) Don’t be too eager to persuade yourself on how “hot” the market is in your area and shoot for the moon when estimating the value of your home. This could cause your home loan and cash out expectations to be out of whack if the appraisal comes in a lot lower. If you want to get a practical sense of the value of your home, start familiarizing yourself with the sale prices of nearby homes that are very similar to yours (the closer in both location and features, the better).
Loan Closing Costs. Don’t forget to account for the closing costs to refinance your mortgage. These are the fees associated with the new loan and are based on a number of different factors, ranging from your credit score to the “LTV” (the “loan to value” ratio – what percentage the loan amount represents compared to the appraised value of the home). Mortgages with lower LTV’s generally qualify for better rates, as the risk for the lender is much less. These closing and financing fees also include origination charges, appraisal, title, county and/or state taxes, and even the costs of starting up your new escrow account. (Don’t worry: the money in your current escrow account goes back to you after closing – based on the terms of your divorce decree).
Shop Around. Make sure to shop around with different lenders to make sure that you are getting a good deal; not all mortgages are created equal, and some lenders have a niche where their pricing is much better than others so find the lender who best serves your niche. There are ways to lower loan costs by focusing on factors other than just the interest rate. If you have questions, please feel free to reach out.
Your Credit Score. If you are fortunate enough to have read this article early into -- or even before -- the divorce process has begun, make sure to keep an eye on your credit score. Outside of income (your “DTI” ratio), your credit score is one of the biggest factors that typically prevents a refinance from happening. Divorce can kill your credit. If you take steps to prevent that from happening before the process even begins, you’ll be paving the way for a better financial outcome after the divorce.
At the end of the day, if there’s a mortgage, there’s going to be some stress and planning involved. However, with the right mortgage professional walking you through each step with transparency, you typically can take care of the key mortgage steps in as little as an hour or two. (Really, it’s not as difficult as you may think).
NOTES FROM BANFIELD COULING LAW & MEDIATION:
(1) THANK YOU to Tom Wells for this helpful information and series of articles, on this subject which affects many divorce individuals.
(2) CONTACT INFORMATION: Tom Wells, Mortgage Loan Originator (NMLS# 2047128) ), with Amerisave Mortgage, can be reached at TWells@AmeriSave.com.
(3) PLEASE NOTE: This blog is not intended to constitute legal, financial or tax advice. We do not recommend making important decisions of the type addressed in this article without specific legal or professional financial advice in advance. We at Banfield Couling Law and Mediation are here to help navigate your legal matter at any stage of your divorce.