Divorce is never easy – especially when trying to navigate through financial transitions. The best way to ease the stress of the separation process is to get educated regarding your upcoming financial decisions. Sorting out your finances in advance is one of the most proactive ways you can prepare for restructuring your living situation and financial obligations.
Options for Your Current Mortgage
One of the largest assets to consider during separation is property that you own with your spouse. You may be committed to a thirty year mortgage with your significant other – what happens if plans change before your mortgage is paid off?
There are few different options when it comes to deciding how to move forward with your current living situation.
Option 1: Refinance Your Current Mortgage
Refinancing your current mortgage allows you or your spouse to continue to live in the home by signing on as the sole owner of the mortgage. The individual that is taken off the mortgage will have the opportunity to move into a new residence without the pressure or financial obligation of the previous home.
Be sure to consider how much longer you plan to live in the soon-to-be refinanced home. Loan refinancing may lead to fees for appraisals and title insurance which may make this option less feasible.
Additionally, individual incomes and credit scores are a critical piece to the refinancing process. You may end up with higher interest rates depending on your standing as an individual applicant. It’s important to talk with a lender about weighing the costs and benefits of refinancing while keeping eligibility in mind.
Option 2: Sell Your Current Home
Another option is to sell your current home and divide the profit between the two spouses. Before deciding to list your home, talk to an appraiser regarding the equity of the home.
Depending on your listing package, the real estate commission, taxes, and title fees may cost between 5-8% of the sale. It’s important to consider the accumulation of these costs against any earned equity before putting the home on the market.
Applying for a New Mortgage
Although getting approved for a mortgage during a divorce isn’t without its challenges, there are few steps you can take to smooth the process. To ensure you can get the best mortgage rate possible, you’ll want to make strides towards financial independence. The following tips will support any independent loan applications in the future:
If you’re recently separated or divorced, you’ll want to separate any open accounts as quickly as possible. This will allow mortgage advisors to take an accurate snapshot of your current financial situation. It will also decrease the chances of hitting a snag during the application process.
Watch Your Credit Score
Once you have your accounts sorted out, make sure to maintain good standing in regards to credit history. Credit scores above 700 are typically viewed as “good” by lenders, while scores in the 800 range are considered “excellent.” Paying off balances in full, making payments on time, and avoiding canceling or opening new accounts will help reinforce your credit score over time.
Prepare Your Paperwork
There are several types of documents needed for the mortgage application process. This paperwork is particular important when dealing with a divorce because it provides the lender with the most up to date information regarding your eligibility.
Having your most recent tax return documentation will help your lender get a clear picture of your recent income as an individual. This is the number that they will use to determine your affordability when searching for homes.
If there’s a significant difference in the amount of money you’ve earned in one of the past couple of years, be sure to explain why this happened (whether it be due to illness/injury, maternity leave, some other life change, etc.)
Child Support Documentation
If there was a child support arrangement, having the official documentation from the court will help determine your accurate debt to income ratio. Whether you are paying or receiving child support, it’s important to gather all these documents before the loan application process.
After your divorce is finalized, a copy of your divorce decree will be helpful as additional confirmation of separate finances. Since your credit only shows individual history, this is further proof that there are no additional financial obligations such as support.
Choosing to stay in your current home or searching for a new property is a decision that will pave the way for your future as an individual. Once your future living situation is sorted out, preparing your paperwork will enhance your eligibility as a lone applicant. Overall, following these preparation steps will ease the short-term financial stress of going through a divorce. If you have any questions regarding the mortgage application or refinancing process, please contact us for additional information.