Qualifying for a Mortgage Post-Divorce
Posted by Carlie Berke, CDFA®
June 21, 2017
A common concern divorcing couples face is whether they will they qualify for a mortgage post-divorce, either to refinance an existing home or to purchase a home. The short answer is yes.
The three most important criteria lenders look at are:
1. Credit Score
2. Reliable Sources of Income
3. Debt Service to Income Ratio
Lenders typically need to see a credit score in the mid-600’s or higher.
Step 1 is to get your credit report and check your credit score and see if it is accurate. The most widely recognized credit score is FICO, computed by Fair Isaac & Co. that is based on financial information tracked by three major credit bureaus: Equifax, Experion, and Trans Union. (For a free credit report from these agencies, go to http://www.annualcreditreport.com). Lenders typically need to see a credit score in the mid-600’s or higher. The higher your score, the better the terms of your loan.
“If you cannot qualify for an unsecured credit card, a secured credit card is an option.”
In some cases, one spouse does not have credit in their own name because they did not have any credit cards or auto loans or other debt in their name during their marriage. If that is the case, then you will need to establish a credit history to help you qualify for a mortgage with reasonable terms. Look into obtaining a credit card. If you cannot qualify for an unsecured credit card, a secured credit card (you put up cash collateral for a period of time) is an option. You should start this process as soon as possible when you are in the process of your divorce.
You want to be able to show at least a two-year history of your revenue stream and an itemized list of your expense deductions.
Next is income and its source. If you have an employment history with W-2 income then the lender will look at your wage history for at least the past two years along with any spousal/child support. If your primary source of income is spousal and/or child support, then the lender will need to see your divorce agreement that states the amount and length of time your support will be paid. You need to have documented support payments that will be paid for a minimum of 3 years and you need to have been receiving support for the past 6 months.
“If you have investable assets that generate annual dividends, interest and/or capital gains income, the lender can also look at the reliability of this income as well.”
If you are self-employed, the lender will look at the history and reliability of your self-employment income, so have good support behind your income. This is because the tax return of the self-employed often shows a lower income after all the business expense deductions for tax purposes. You want to be able to show at least a two-year history of your revenue stream and an itemized list of your expense deductions. This will help the lender better understand your self-employment income.
Ultimately the lender is trying to compute your debt service to income ratio. They will look at all your monthly debt payments including credit card debt with outstanding balances, student loan debt, second mortgages, equity lines of credit, auto loans or leases and any other debt service that you pay on a regular basis. This total number goes in the numerator along with the estimated mortgage payment of your new home loan. The denominator is your total income as computed by the lender. Lenders like to see this number below 43%. If the number is above that then you need to look at a smaller mortgage or pay down some of your other debt.
Obtaining a mortgage post divorce may not be immediately attainable, but if you work towards establishing or improving your credit, reducing other outstanding debt and keeping good records on your income, you will be well on your way.
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