Going through a divorce is usually not a simple process. In addition to the emotions that come with divorce, there are plenty of financial details to sort through that require agreement with your ex. It’s natural for you to start thinking about life on your own and your new beginning. For many, this includes wanting to get into a new home as soon as possible. There’s a lot to consider before you buy, so take a close look at your finances and your new life before deciding.
1. Maintain job stability. How long have you held your current job? Typically lenders want to see at least two solid years of employment at the same place, with income staying steady or increasing at the end of that period. Even if you hold a job and make enough money to qualify for a loan, you still might have trouble getting lender approval right away. If you’re self-employed, lenders could ask for two to three years of steady income history. If you’ve had a steady job and want to switch jobs soon, you might want to wait until after you’ve closed on your new home.
2. Protect your credit. With all the details to address in a divorce, it’s not uncommon for some bills to go unpaid or get paid late. When bills are 30 days past due, creditors can report delinquencies to the credit bureaus, which lowers your personal FICO score. Even a few late payments can drop your credit score significantly. And the finalization of your divorce can have an impact on your score as well. When joint accounts of long-standing good history get split between spouses, it’s possible each of their credit scores can go down. If you share credit cards with your ex, make sure balances are paid off and the joint accounts are closed. If you share an auto-loan with your ex, consider selling off the vehicle to pay for the loan. Or one person can refinance the vehicle in his or her name and remove the other person’s name from the title. You don’t want to get into a situation where your name is still on a joint loan and you retain liability in its payment. If you’re planning to buy a home after your divorce, you need to keep watch of your credit score and responsibly protect it.
3. Know your debt-to-income ratio. Today the majority of loans must follow a set of rules enacted by the Consumer Financial Protection Bureau (CFPB). The CFPB states that your monthly debt, including mortgage, can’t exceed 43% of your monthly pretax income if you’re to qualify for a home loan. Any lender you choose will be required to take a close look at your debt-to-income ratio. If you’re required to pay alimony or child support for any length of time, it will likely be counted as additional debt beyond anything showing up on your credit report. On the other hand, if you receive alimony or child support, you can count this money as additional income (with proof of payments received and proof they’re scheduled to continue for a certain length of time).
4. Save cash. Divorce can be costly. You might need to rebuild your savings before buying again. If you and your ex had to sell a house, you can use the proceeds as a down payment on your next home. But it’s not advised to buy a house if you’re cash poor. Besides the down payment, you’ll have inspection costs, closing costs, and moving costs. And remember, houses are investments that require ongoing maintenance costs, not just mortgage payments. You need a cash reserve to buy a home.
5. Be flexible about what kind of home you can afford. If you find that you’re in a financial position to buy, then define what kind of home makes sense for you in your new life now and down the road. If you have children, this decision is particularly critical as your home needs to satisfy more than one person. You may need to sacrifice some things you’ve gotten used to having in order to go forward, like a spacious yard or the same neighborhood. Practicality doesn’t have to be a negative. Weigh the pros and cons of expanding your location, size, or style desires to get the most for your money.
If it turns out that buying after divorce is right for you, meet with a lender for pre-approval. This is the first step for all types of buyers. Once you have pre-approval, find a qualified Realtor® you trust. Friends or family may give recommendations when they’re happy with the service they’ve received. Follow your own intuition. If you don’t feel a good rapport or you’re unsure whether an agent has your best interest at heart, talk with several more agents for comparison. You want to be sure your agent works exclusively for your interests as a buyer. It also helps if an agent is experienced working with clients in your shoes. You’ll have a better experience working with someone who understands your needs.