After a divorce, many new singles are looking for a fresh start. Whether you still live in your marital home or not, it is understandable to want a place you can call your own. But re-entering the mortgage market after a divorce can be complicated. If you are planning to purchase your own home post-divorce, it is crucial to have a plan and a good understanding of your financial situation. Here are some important questions you need to ask yourself before purchasing a home after a divorce.
1. Is refinancing or a mortgage modification an option?
Too much change at the same time can be difficult for some, especially if kids are involved. If you want to stay in your current home but worry about keeping up with the mortgage payments, it may be possible to refinance or modify the existing mortgage. Remember that your former spouse may be entitled to compensation for their share of the equity in the home. If both of you are on the mortgage, you will need to have the mortgage requalified. Your lender will look at your income, assets, and credit history to determine if you can afford the mortgage payments alone. If you are keeping the home, you should also consider removing your ex from the title so they no longer have legal rights to the property.
2. If keeping your home is not an option, can you afford a mortgage payment?
If you were a two-income household, losing your former spouse's income will qualify you for a lower loan amount than you may have previously qualified for. When considering your income, you will need to factor in child support or alimony payments (whether you are on the paying or receiving end). In addition to your income, you will need to factor in your debt-to-income ratio. Divorce is expensive. If you are in debt following your divorce and your debt-to-income ratio exceeds your lender's allotted percentage, it may be challenging to secure a loan. Once you have a complete picture of your finances, you can determine if you can afford a home and how much you can realistically pay for it. An industry rule of thumb is to keep your monthly debt payments under 43% of your before-tax income.
3. Do you have money for the down payment and closing fees?
You may have the monthly income to afford a mortgage, but you will also need to have cash on hand for the down payment, escrow, and closing fees. It is very common for divorce to drain the financial reserves of those involved. Many loan programs will require you to prove you have the cash to cover these expenses prior to approval.
4. Is your credit score good enough to get approved for a loan?
You can qualify for the lowest interest rates if you have a healthy credit score. A high credit score is also something lenders look for when deciding whether applicants will qualify for a loan. If you have a lower score or have never had to develop your credit history, it can make purchasing a home difficult. Establishing a good credit history and a robust score will increase your chances of approval and decrease your monthly payments. It can be worth the significant savings to wait to purchase a home until your credit score is higher.
We know the value of a fresh start. If you are considering buying a NJ home following your divorce, Veitengruber Law can help. Our team can help you work through the financial and legal complexities of buying a home.