I’m not an attorney and I don’t give legal advice. But after closing more than 10,000 loans, I’ve witnessed problems clients often have trying to purchase a home after divorce. There are many reasons this can happen, but many are avoidable if the marital settlement agreement includes specific language regarding the distribution of debts, real estate, alimony, and property.
When applying for a loan, lenders will review what debts you are now responsible to pay, whether your credit report has late payments, how long alimony/child support payments will last and the division of assets and liabilities.
Here are some considerations to discuss with your attorney:
When joint debts (such as credit cards) are divided, the creditor name and account number should be specifically defined. For example, instead of stating “VISA credit card,” the actual bank, account number and balance should be clearly stated.
If child support and/or alimony are awarded, those payments typically require proof of receipt for six months before they are eligible for consid- eration as “income” for loan approval. They must also continue at least three years after the closing date on a new loan. If you plan on buying a home and need this income to qualify, it’s better to receive less money per month over a longer period of time. For example, instead of alimony set at $5,000 per month for two years, stretch those payments to $2,500 per month over four years to meet the three-year requirement.
Property distribution payments are not considered qualifying income for a home loan, regardless of how long payments will be received.
Both spouses will have their future credit report negatively affected by any late payments on open joint accounts incurred during the marriage. Even if the settlement agreement orders one spouse to pay a debt, the creditor will report all late payments to both party’s credit report. This can have a long-lasting and detrimental effect on your ability to obtain credit, rent or purchase a home, and obtain security clearance. A best practice is to be removed from liability on all joint accounts; this will prevent your credit from being damaged if late payments are made by your ex-spouse. It can also stop future unauthorized charges in your name after the divorce is finalized. Regardless of the settlement agreement, the creditor can come after both parties for payment if you are listed jointly on the account. This may well lead to costly litigation to hold the ex-spouse responsible for payment and will likely damage your credit report for as long as seven years.
If any real estate is encumbered by a mortgage, the best practice is to require the spouse retaining ownership to refinance the loan into just their name. By refinancing the loan out of name, your liability ends and the debt and payment are no longer your responsibility. I recommend that all loans be refinanced within six months of the divorce decree; at this time a quit claim deed can be done simultaneously with the loan refinance.
Once the property is solely in your name, you may need to refile for homestead exemption; check with your local property appraiser’s office for guidance about this.
Divorces are difficult enough without adding the additional stress as a result of misunderstandings or vague terms that negatively affect all parties for years. The best practice is to have a clearly written agreement that addresses all financial matters.
An experienced attorney can guide you and make sure your interests are protected and will reach out and consult with finance or accounting professionals if further clarification is needed or to structure an agreement that addresses all issues. Once finalized both parties can move on, avoid future litigation and stay out of the courtroom!
Bobbie Dyer is Division President of Dyer Mortgage Group in Melbourne and had more than 30 years in mortgage banking, over 10,000 loans closed and over $500,000,000 in home mortgages. Dyer has been recognized as a Nationwide Top Producer, along with being voted one of the “70 Elite Women in Mortgage Banking in the U.S. in 2018.”