How to Buy a House After a Divorce
The emotional grief of divorce is all too easy to anticipate, but many people fail to realize how big a financial blow it can land. One of the biggest financial struggles people face at the end of their marriage is how to buy a house after a divorce.
Owning a home is a big part of the American dream, and many parents also equate homeownership with providing a stable and safe environment for their children. However, the average cost of a house in the United States is $417,700.
Saving up for a down payment on a home and covering the mortgage each month is a lot easier for a two-income household or for a household where one spouse has the time and availability to pursue a lucrative career while the other stays home.
When divorce hits, individuals can find their household income cut in half or worse. If one spouse is a stay-at-home parent they could be in even more dire financial straits. In this situation, how can you afford to buy a home? More importantly, is homeownership the right move?
In this article, we’ll look at three main options for housing after a divorce.
- Keeping your current home
- Buying a new house after a divorce
- Renting a home
Keep Your Current Home
A lot of people want to keep their current home after a divorce, especially if they have children or strong community ties. How can you keep your existing home, and what will that do to your finances?
Negotiate with Your Spouse
Obviously, you and your spouse both can’t keep the house, so if you want the house, you’ll need to negotiate for it. In most cases, your home will be marital property, meaning your spouse will be entitled to a portion of the equity. If you want to keep the home, you’ll need to find a way to give your spouse their share of the equity. That may mean giving them more assets, money from your savings or investment accounts, or a portion of your retirement savings.
If you are working with a divorce lawyer, your attorney can help you develop a settlement strategy that includes you keeping the house.
Getting Your Ex Off the Mortgage
There are two ways to get your spouse off the mortgage if you’ve both agreed that you will keep the home. The first is to provide a quitclaim deed along with your divorce decree to your lender.
If you plan to keep your existing mortgage, you will need to re-qualify for that mortgage with your lender. This can be tricky for a newly single individual, especially if you were the lower-earning spouse.
You’ll need to prove to your mortgage company that your income-to-debt ratio is sufficient on its own to allow you to cover your monthly mortgage payments. Your mortgage company will also look at things like
- Your monthly income
- Your debt
- Your assets and savings
- Your credit history
- Your credit score
All of these factors will come into play in re-qualifying for your mortgage.
Refinancing Your Mortgage
The other way to get your ex off your mortgage is to refinance your home. Refinancing means you will get a brand new mortgage that will pay off your previous mortgage loan. Refinancing could be a good idea if your ex wants their portion of the home equity and you don’t have other assets to give them.
Keep in mind that you’ll need to qualify for a refinance the same way you would to take over your existing mortgage. You’ll still need to prove to your new lender that you have the financial means to cover your new mortgage.
Additionally, your refinance will come with a new interest rate on your loan. Your monthly payment may actually be less if you get a better interest rate on your refinance. However, recently, interest rates have increased significantly, so you may also face a much higher monthly mortgage payment at a time when you may be least able to afford it.
Another important thing to keep in mind is that when refinancing, you’ll also have to pay closing costs, which are typically 3 – 6% of your loan amount. If you are getting a $300,000 loan, be prepared to shell out $9,000 to $18,000 in closing costs!
How Alimony and Child Support Affect Your Mortgage Qualification
When a lender looks at qualifying you for a new mortgage loan or taking over your existing loan by yourself, one big factor they’ll consider is your income. Alimony (also called spousal support) and child support could affect this calculation.
If you will be receiving long-term alimony and/or spousal support, a lender may include this in your income amount, which could boost your chances of approval.
On the other hand, if you are obligated to pay long-term alimony and/or child support, this could lower your income level and make it harder for you to qualify for a new mortgage loan. If your payment obligations are short-term, however, a lender may not take them into consideration when approving you for a loan. A lot will depend on the lender and your specific situation.
Can You Afford to Keep Your Home After a Divorce?
Unfortunately, many newly single individuals simply can’t afford to stay in their house after a divorce. They may struggle to qualify for a refinance on their own and to come up with the money to pay off their spouse’s share of the equity.
Making a monthly mortgage payment, as well as covering utility bills, home insurance, property taxes, and repairs bills on a single salary can be extremely difficult, especially for the lower-earning spouse.
It is incredibly important that you consider all the costs related to keeping your home. As hard as it is, put your emotions aside and look at the bigger financial picture. Is keeping the house truly the right financial move? The answer may be no.
Alternatively, if you and your spouse seek mediation or agree to a collaborative divorce, you may be able to negotiate with your higher-earning spouse to assist with the mortgage payments. Most parents want to provide their children with a stable environment and they may be willing to pitch in so you and your kids don’t have to move.
Buying a New House After a Divorce
If you fear that you can’t afford your current home, it might be worth looking for a lower price house or even a condo or townhome. Every city has a mix of different-priced housing, and you may even be able to find a good deal within your same neighborhood, especially if you are willing to polish a “fixer-upper.”
Here are a few factors to consider if you are thinking of buying a new property after a divorce.
You’ll Still Need to Qualify for a Mortgage Loan
That’s right, unless you’re independently wealthy, you will need to qualify for a mortgage loan by yourself if you want to purchase a new home. As with a refinance or taking over your existing mortgage, you’ll need to prove to your lender that you can afford the amount of loan you’ll need.
It can be difficult to qualify for a mortgage after divorce. Before even applying for a loan, consider your income, debts, and assets and determine if you think you can make mortgage payments for the amount of house you want. Don’t forget to take a look at all your financial obligations. If you are responsible for paying alimony or child support, that will affect how much money you can pay for your motgage.
Research your preferred housing market to determine how much real estate costs in that area. You’ll also want to look at current mortgage rates to consider how much your monthly payment is likely to be.
Consider an FHA Loan or a VA Loan
Many lenders will expect you to come up with at least 10% of a home’s cost as your down payment. Many people, especially recent divorcees, simply can’t afford that type of down payment. You do have options.
One of the most popular types of loans is an FHA loan. An FHA loan is a mortgage loan backed by the Federal Housing Administration. These loans often offer less strict qualification criteria, require lower down payments, and have lower closing costs.
In fact, depending on your credit score, you may be able to put down as little as 3.5% on your purchase with an FHA loan. On a $300,000 loan, that’s just $10,500 paid upfront instead of $60,000 for a loan that requires a 20% down payment.
FHA loans do come with some limitations. They can only be used for buying a primary residence, for example, and they can’t be used on homes with high purchase prices. (The exact limit will depend on housing prices in your area.) If you pay less than 20% on your down payment, you’ll also have to pay an extra monthly fee called a mortgage insurance premium (MIP) until you build up sufficient equity in your home.
If you are currently serving or have served in the military, you may qualify for a VA loan from the Veterans Administration. VA loans can be a great option, as they often require no down payment or mortgage insurance. They can also have more lenient approval requirements than commercial loans and can offer low interest rates and low closing costs. The downside of using a VA loan is that not every type of property qualifies for a VA loan and not every seller wants to go through the extra hoops necessary to work with a buyer using a VA loan.
Your real estate agent can give you more information on your loan options. You might also want to speak with one or more mortgage brokers to find the best loan for your circumstances.
Selling Your Previous Home
If you want to buy a new house after a divorce, it’s a good idea to sell your previous home first (unless you plan on turning it into a rental property). If your spouse wants to keep the home, make sure you take your name off the mortgage. You can send a quitclaim deed and your divorce decree to your lender to remove yourself from the mortgage or your ex can refinance the house.
It’s important to take your name off the mortgage of your previous home because if you don’t, a lender will consider that property’s mortgage payment as part of your debt liability. This could seriously hurt your chances of qualifying for a mortgage or lower the amount you are approved for.
Understanding Your Debt and Credit Score After Divorce
Your amount of debt as well as your credit score will play a big role in your ability to get approved for a mortgage loan. A low credit score could also mean you’ll pay a higher interest rate on your loan.
Consider how much debt you’ll take with you when you’re developing your divorce settlement. If your spouse took out a lot of loans and debt during the marriage, you may be on the hook for a portion of that debt.
Additionally, if you and your spouse shared credit cards and credit accounts, missed payments or outstanding debt could harm your credit score. If you and your ex still share accounts, make sure to close them. That way, if your ex misses future payments, it won’t affect your credit score.
Work with a Real Estate Agent who Understands Divorce
No matter where you live, chances are that you have many real estate agents in your area that you can work with. While it might be tempting to pick a family member or a friend who happens to have their real estate license, don’t take this decision lightly. A good real estate agent will guide you toward the right types of homes based on your needs and budget. They can help you craft competitive offers and improve your chances of being picked in a competitive seller’s market. A bad real estate agent could leave you spinning your wheels or even steer you toward a purchase you will later regret.
Divorce adds all sorts of complications to a person’s finances, so consider working with an experienced, reputable real estate agent with specific expertise in divorce. Some agents specialize in working with divorcees and are Certified Divorce Real Estate Experts (CDRE).
Your divorce attorney may also be able to refer you to a seasoned real estate agent who works with recent divorcees.
Be Prepared to Buy a House After a Divorce
Take a look at your financial situation—or, better yet, sit down with a financial advisor—and figure out how much house you can afford after your divorce. Don’t forget to add in costs for closing costs, utilities, insurance, property tax, and repairs.
When you’re ready, apply for a loan with multiple mortgage lenders to see how much you can qualify for. Keep your mind open and your expectations flexible. A smaller house can still be a wonderful home. It’s all about the love, not the square footage.
Find a Co-Signer
If you are intent on buying a home or refinancing your current home but your income ratio makes it difficult for you to qualify for a high enough loan, one final option is to find a co-signer. Asking someone to co-sign on your loan is a huge favor with significant financial consequences. If you start missing mortgage payments, your co-signer will be responsible for them, which could drain their bank account and destroy your relationship forever.
However, if you feel confident that you can afford a certain mortgage even if the bank doesn’t think so, consider asking your parents, siblings, or a close friend to co-sign. If you are on good terms with your ex, perhaps even he or she would be willing to co-sign.
Rent Instead of Own
For many people, buying a home is not the right financial decision right after a divorce. No matter how much you love the idea of owning a home, that doesn’t mean it’s a smart move for you. Look at your financials. If you don’t have a down payment available, a rainy day fund, and a steady income that more than covers the mortgage, it may be better to rent a home, condo, or apartment.
Renting During a Divorce
It may be a good idea to rent a place during your divorce proceedings or during a separation, as it can be extra tricky to qualify for a mortgage loan during your divorce process. Also, you won’t really know where your finances stand until the divorce process is complete and you have a divorce decree that lays out the separation of your debts and marital assets.
Renting for a Short Time After a Divorce
Searching for, buying, and moving into a new home is a big, stressful process. It’s okay to hold off on that as you slowly adjust to your new single life after a divorce. In fact, it might be better for your emotional health to simply rent for a year or two while you get your bearings and settle into your new life.
It’s also worth it to take time to decide where you want to live after your divorce, what kind of property you want, and how much you want to spend on your monthly housing expenses. If your kids are nearing the age where they will be leaving the house soon, it may also be smarter to rent for a period of time until they leave the nest so you can find a property that better fits your new lifestyle.
At the end of the day, there’s really no rush. Give yourself time to heal.
Renting Doesn’t Have to Be Permanent
After looking at your finances and situation, you may find that renting is a better choice right now than buying a new house after a divorce. Keep in mind that nothing is permanent. Renting may be the right decision today, but that doesn’t mean you won’t own a home sometime in the future. In fact, renting can help you save money for a future down payment or give you the breathing room to financially recover from your divorce.
A lot of parents worry that renting will have a negative impact on their children, but if buying a home will cause you to stress about money and make it difficult for you to afford all the necessities your family needs, then renting will be a net positive. Children need love more than they need an extra playroom or a huge kitchen. When you feel confident in your financial position, you are better able to give your children the support and care that will really help them flourish.
Not sure what to expect during a divorce? Then sign up for a Second Saturday Divorce Workshop in your area.
