Buying A Home After A Divorce
When married, your finances, living and housing costs are typically combined, but once divorced, you’re an individual, and your ability to buy a house may be hindered by the loss of a second income, the requirement to pay spousal support, or even the legal costs involved in a challenging divorce.
You need to start moving forward with your life, and that can involve handling your current home after the divorce and expenses or looking to buy a new house of your own. No matter your goals with your housing situation after divorce there are many challenges and things to consider.
Detailed below are some of the most common questions, and issues answered that can help you decide whether buying a house is possible and what to do with a house after you’re divorced.
Buying A House After A Divorce
Review New House Locations
Buying a new house means a new location, which needs to be considered. You may no longer be able to afford to buy a house in the same area as before, this could cause a number of lifestyle issues that might make buying a house less desirable.
If your new house options are further away from your work and other activities you do daily, your commute is going to be longer, and your expenses may be higher, especially if you now need to pay for much more gas monthly.
You should also consider any kids you have, you may not want to have a long commute to transport them back and forth to your ex-spouse's house, and you need to think about which school district they qualify for if you buy a house in another area.
Review Your Current Financial Situation
It’s important to take a look at your current financial situation and how your divorce impacted your finances, savings, and ability to make payments on a mortgage and pay for your other housing costs and general living expenses.
- Review your total income and assets, including current savings.
- Determine how big of a down payment you can currently make from your savings.
- Make a budget for your current living expenses, including all debt repayments, and determine a maximum monthly payment you can make towards a mortgage.
Once you know how much money you have available, you need to look at the costs associated with owning a new house, including:
- Mortgage payments
- Property taxes
- Monthly utilities (water, power, internet, phone, etc.)
- Insurance payments
- House repair costs now or upcoming (new roof, general maintenance costs)
- New furniture for a new house
There may be other expenses, so it’s worthwhile to review what has historically been paid and consider those costs as well. Don’t forget basic living costs like monthly food, childcare, and anything else that slowly chips away at your available monthly income.
Once you’ve calculated everything, you’ll need to review the possibilities around getting a new mortgage and what types of homes you can afford.
Calculate Your Debt-To-Income Ratio
When buying a new house in Las Vegas, or anywhere else, your mortgage lender will be reviewing your debt-to-income (DTI) ratio as part of the overall assessment of a mortgage, and you should be reviewing that as well to see if a mortgage is even possible right now.
Your DTI is the percentage of gross monthly income (before taxes) that you need to pay for all of your monthly expenses, including debts. It helps lenders decide if you can repay the mortgage, the higher your DTI, the riskier you are to lend money.
Calculate your DTI: (expenses) divided by (income) = DTI
- $1,000 (expenses) / $4,000 (income) = 0.25 or 25% DTI
Your DTI is broken into two parts:
- Front-end Ratio (Housing Ratio) calculates your housing expenses against your gross income. The ideal DTI for the front-end ratio is 28% or less.
- Back-end Ratio calculates all expenses against your gross income. The ideal DTI for the back-end ratio is 36% or less.
Some larger lenders will consider a DTI of up to 50%, but if you’re above 50%, you need to lower your DTI.
- Remove unneeded expenses and put more money towards lowering your debt.
- Reduce debt repayments by consolidating current debt into a single loan with a lower monthly repayment.
- Don’t create more debt
Check Your Credit Score
Your credit score does two things for a mortgage pre-approval, it helps your lender determine if they will lend to you in the first place, and it can help determine your interest rate on repayments, which can reduce your overall repayment by thousands of dollars.
Typically, a credit score of 650 is required for a mortgage from a major lender, but 700 or higher will give you more options and is considered ideal. You have other options if your credit score is lower, including:
- Pay a larger downpayment
- Include a co-signer, such as your parents.
- Look to smaller or private mortgage lenders.
- Credit unions often accept lower credit scores
- FHA loans are backed by the government and have lower requirements.
If your credit score is too low, you don’t qualify for an FHA, and you don’t like the terms from smaller lenders, you need to look at improving your credit score before buying a house.
- Pay down your debts, including past-due debts.
- Always pay your debts on time going forward.
- Keep your credit cards or lines of credit paid off as high usage lowers your credit score.
- Don’t apply for new credit accounts.
Removing Your Name From Family Home And Mortgage
If your family home is staying with your ex-spouse after divorce, you should be removing your name from the title of the house and the mortgage attached to it. You may not be responsible for making payments, but the debt is still being calculated against you.
If you’re already attached to another mortgage, your debt-to-income ratio will be impacted and make getting a new mortgage much more challenging.
If your spouse misses a mortgage payment, your credit score can also be impacted, which is a problem for your future mortgage options and could end up costing you money.
Your options for removing yourself from the mortgage can include:
- Selling the home
- Your ex-spouse will need to refinance the home loan, and they may not qualify to do so.
Buying And Selling A House During A Divorce
Buying or selling a house during a divorce can be challenging process, there is more paperwork and cost involved, and in some states, you may be required to get court approval before you can make the purchase.
If you’re selling your family home so you can buy a new house, it’s much better to sell before you commence divorce proceedings or wait until after everything has been finalized. Of course, this isn’t always possible, but you will incur more costs and effort during a divorce.
*Disclaimer: This material is provided for information purposes only and is not to be construed as investment or tax advice. Readers are strongly advised to consult with their professional advisors regarding the information herein.