By Jonathan Blinken | Strategies For Wealth, AAML NJ Bronze Sponsor
Even under the best of circumstances, divorce is one of the toughest life events some of us have had to face. Not only are there emotionally complex relationships to detangle, but also there are also complicated financial arrangements and responsibilities to work through. From joint bank accounts, to car financing, to mortgages, the changes can seem overwhelming.
It’s not all bad news, of course. There are significant benefits to finalizing a divorce. You may find that you are:
- Happier with your life.
- Healthier than you would be had you stayed in a bad relationship.
- Less frustrated financially.
- Happier in your next marriage, based on what you learned the hard way in the first marriage.
- Seeing happier children, because two home parents who are happy, are better than one home with two miserable parents.
- More prepared for retirement than you expected to be, particularly if you are female. A University of Connecticut study of 40 years of census information, supported the fact that women experienced greater earnings growth if they chose not to remarry. Why? Those women delayed drawing Social Security and therefore made more money to gain financial independence.
However, you may also be losing a home you have grown to love and have worked very hard to purchase and maintain.
Homes Owned by Both Spouses
If you and your spouse owned a home together, try to get it paid off and whoever is keeping the house should attempt to qualify on their own to continue paying the mortgage and remove the other party from the deed. Since the initial mortgage approval was likely based on two incomes, becoming a sole owner may present challenges. You may both need to re-assess the need and benefits of selling the home versus keeping it under a sole owner. Perhaps a rental, or downsizing, is the better option for everyone for the short term. Give this due consideration and make the decision that works best for everyone.
If you want your ex-spouse to remain in the home, with the children, and he/she is not able to refinance the mortgage alone, you may decide to leave it in both names for a period of time. That decision is a personal one, and if your spouse has been staying home to care for the children, it may be best for everyone to keep the home in both names. There is likely enough upheaval amidst the divorce for everyone without having to move everyone and everything out of the existing home.
If selling the marital home is the final decision, be certain that both spouses have the proper legal documents in place to ensure any profits from the sale of the home are shared and distributed appropriately.
Based on your relationship, it may be possible for both spouses to remain in the home during divorce proceedings, which may help save money. If that isn’t comfortable for everyone, you have other options, short of crashing on your friend’s couch:
- Rent a one-bedroom apartment
- Rent a small house or condo
- Rent with the option to buy
- A live-in hotel that includes a kitchen (if your company puts execs up at a location, you may be able to score the corporate rate)
If you’ve decided to buy, let’s review how a mortgage approval works. Bear in mind that regulations can change as quickly as bank procedures. While the following are good guidelines, you may find specific approval criteria have evolved.
- Most banks and mortgage companies are want to see at least two years of continuous employment at the same organization and at the same, or increasing, rate of pay.
- Be prepared to provide documentation of all your assets and income sources.
- Be sure you have minimized your debt where possible document all liabilities, along with proof of the debt. This will include child support and alimony (or spousal support) obligations. You will need to document separation and divorce decrees.
- The larger the down payment, the better your chances of approval. A minimum of 20 percent is recommended.
- An 80 percent loan will help you avoid private mortgage insurance (PMI), which increases your costs. The lender is the only one who benefits from PMI.
- A copy of your tax returns, W-2s, pay stubs, and any invested funds will also need to be accounted for and documented.
- Be sure your credit report is clean, and your credit score is greater than 500. The higher your credit score, the better able you will be to secure a lower interest rate. Try to get your score above 600, 700s are even better.
- Being late more than 30 days on just one bill could adversely impact your score. Be sure to stay diligent with your existing debt payments, especially if you currently have another mortgage liability.
- If you have a prior foreclosure or bankruptcy on your record, approval is going to be harder, so brace yourself. You may have to rent until those items drop from your record. Depending on the specifics of the prior bankruptcy or foreclosure, it could be as few as two years or as many as ten.
Before you begin shopping and talking with agents and sellers, I encourage you to obtain a pre-approval from your lender of choice. That serves two significant purposes:
- You will know exactly what price range you should be searching.
- The real estate agent and seller will appreciate knowing you have already been pre-approved.
Remember, there is nothing wrong with waiting a few months, or years, to ensure you are fully prepared for one of the largest investments of your life. It may actually be better to wait until the divorce is final to seek your mortgage approval. Pending litigation may be a turn-off for the lender, because the alimony and child support obligations may still be unknown.
Ensure you shop for a mortgage broker; consider rates, terms, and size. A larger bank or credit union may have volumes that permit them to offer lower rates. There are also varying products available, including: fixed rates; adjustable rates; 15, 20 and 30-year terms; balloon mortgages; VA; FHA; or an interest-only loan. You may have homework to do based on the extent of your financial capabilities and prior home buying experience. Make sure you ask questions about all the fees and interest rates. While federal regulations dictate a level of consistency across the board, in many cases, the lender may have a little wiggle room and it never hurts to ask!
Devil Is In the Details
As you begin the process of shopping for an agent, and a home, consider a few things before reaching out to anyone. The National Association of Realtors provides training, support, and a code of ethics and is a great starting place with more than one million members. It’s okay to “interview” the agent before making a commitment. Some items to discuss include:
- How well they know the area in which you are looking for a home.
- Their experience level, and how long they have been in the real estate business.
- What current market conditions are like.
You will want to find an agent that makes you feel comfortable and fully understands your needs and expectations. Having an agent that understands divorce implications, both financially and emotionally, can be an added benefit Be sure they represent you and not the seller!
Location, Location, Location!
- Do you want to be in a neighborhood with kids of a similar age to your children?
- What is the local school system like?
- Do you need to be close to the kids’ schools or daycare?
- Do you want to be near religious or community centers?
- Do you need access to public transportation? Are there suitable parks in the area.?
- Do you need additional space for aging parents, or the kids should custody arrangements change?
- What style home appeals to you, will you consider a condo or apartment?
- Are there any community regulations and homeowner’s association fees?
Plan to spend an average of 30 days to locate the perfect home, which will likely entail visits to 15 to 25 properties, or more. You’re probably going to be in your home for years to come, so find something that meets your needs and tastes, and fits within your budget.
Divorce tends to be costly, even excluding housing costs. We all incur various expenses associated with ending a marriage, and in many circumstances, they can be significant. However, there are some steps you can take to ensure that you either remain financially sound or quickly return to financial security post-divorce. Here are a few tips I found helpful for my divorce:
- Save as best you can, and remember there is a difference between needing something and wanting something. Try to exercise a little restraint on the wants, and only satisfy your needs, at least for the short term.
- Protect your credit report and scores. While divorce itself may not have a direct impact, it’s easy to accidentally miss a bill if you’re unsure who is supposed to be paying. Not only does this incur late fees, but your credit score may also be impacted negatively. Any joint accounts you have with your spouse should be paid in full as soon as possible and the credit then re-established in your separate names. I know that’s easier said than done; however, getting rid of debt in both names is going to help both spouses.
- If you don’t already have identity theft/credit monitoring protection, get it! With so many data breaches occurring these days, this should not be considered optional. This often includes additional features including access to your annual credit reports and scores.
- The divorce may impact your taxes as well, another critically important financial consideration given your new family structure.
You are navigating through an emotional time in your life. Some researchers report that divorce is the single most stressful event in anyone’s life, so be kind to yourself and be patient. You deserve the best life has to offer, so take the appropriate steps to ensure you are getting what you need and want out of life.