By Bill Bolton, Sr Mortgage Planner Countrywide Bank FSD
When a marriage ends in divorce, the lives of those involved are changed forever. During this time of upheaval, one thing that shouldn't have to change is the credit status you've worked so hard to achieve.
Unfortunately, for many, the experience is the exact opposite. Unfulfilled promises to pay bills, the maxing out of credit cards, and a total breakdown in communication frequently lead to the annihilation of at least one spouse's credit. Depending upon how finances are structured, it can sometimes have a negative impact on both parties.
The good news is it doesn't have to be this way. By taking a proactive approach and creating a specific plan to maintain one's credit status, anyone can ensure that "starting over" doesn't have to mean rebuilding credit.
The first step for anyone going through a divorce is to obtain copies of your credit report from the 3 major agencies: Equifax, Experian®, and TransUnion®. It's impossible to formulate a plan without having a complete understanding of the situation. (Once a year, you may obtain a free credit report by visiting www.AnnualCreditReport.com.)
Once you've gathered the facts, you can begin to address what's most important. Create a spreadsheet, and list all of the accounts that are currently open. For each entry, fill in columns with the following information: creditor name, contact number, the account number, type of account (e.g. credit card, car loan, etc.), account status (e.g. current, past due), account balance, minimum monthly payment amount, and who is vested in the account (joint/individual/authorized signer).
Now that you have this information at your fingertips, it's time to make a plan.
There are two types of credit accounts, and each is handled differently during a divorce. The first type is a secured account, meaning it's attached to an asset. The most common secured accounts are car loans and home mortgages. The second type is an unsecured account. These accounts are typically credit cards and charge cards, and they have no assets attached.
When it comes to a secured account, your best option is to sell the asset. This way the loan is paid off and your name is no longer attached. The next best option is to refinance the loan. In other words, one spouse buys out the other. This only works, however, if the purchasing spouse can qualify for a loan by themselves and can assume payments on their own. Your last option is to keep your name on the loan. This is the most risky option because if you're not the one making the payment, your credit is truly vulnerable. If you decide to keep your name on the loan, make sure your name is also kept on the title. The worst case scenario is being stuck paying for something that you do not legally own.
In the case of a mortgage, enlisting the aid of a qualified mortgage professional is extremely important. This individual will review your existing home loan along with the equity you've built up and help you to determine the best course of action.
When it comes to unsecured accounts, you will need to act quickly. It's important to know which spouse (if not both) is vested. If you are merely a signer on the account, have your name removed immediately. If you are the vested party and your spouse is a signer, have their name removed. Any joint accounts (both parties vested) that do not carry a balance should be closed immediately.
If there are jointly vested accounts which carry a balance, your best option is to have them frozen. This will ensure that no future charges can be made to the accounts. When an account is frozen, however, it is frozen for both parties. If you do not have any credit cards in your name, it is recommended you obtain one before freezing all of your jointly vested accounts. By having a card in your own name, you now have the option of transferring any joint balances into your account, guaranteeing they'll get paid.
Ensuring payment on a debt which carries your name is paramount when it comes to preserving credit. Keep in mind that one 30-day late payment can drop your credit score as much as 75 points. It is also important to know that a divorce decree does not override any agreement you have with a creditor. So, regardless of which spouse is ordered to pay by the judge, not doing so will affect the credit score of both parties. The message here is to not only eliminate all joint accounts, but to do it quickly.
Divorce is difficult for everyone involved. By taking these steps, you can ensure that your credit remains intact.
How Purchase Loans Are Made A Step-By-Step Walkthrough
1.
Pre-approval - Getting pre-approved for a mortgage allows borrowers to know exactly how much house they can afford. Viewed as "cash buyers", pre-approved borrowers have greater negotiating power as well.
2.
Loan Search - Buyers should seek the advice of an experienced mortgage professional, someone who will help determine which financing options best suit their needs today and in the future.
3.
Loan Application - It's crucial that consumers supply the lender with as much information as possible, as accurately as possible. All outstanding debts as well as assets and income should be included.
4.
Documentation - Buyers must submit paperwork supporting the application as well. Information commonly sought includes pay stubs, two years' tax returns, and account statements verifying the source of the down payment, funds to close and reserves.
5.
The Hunt - The buyer begins shopping for a house. When the right one is found, the terms of the sale will be negotiated, including the price and potential terms of the loan being sought.
6.
Appraisal - Lenders require an appraisal on all home sales. By knowing the true value of the home, the borrower is protected from overpaying.
7.
Title Search - This is the time when any liens against the property are discovered. A lien may have been placed on a property to ensure payment of outstanding debts by the owner. All liens must be cleared before a transaction can be completed.
8.
Termite Inspection - While most purchase loans do not require a formal inspection for termite and water damage, some loans (especially government loans) allow for the possibility. If problems are found, repairs may be necessary.
9.
Processor's Review - The mortgage professional packages all pertinent information and sends it to the lending underwriter, including any explanations that may be needed, such as reasons for derogatory credit.
10.
Underwriter's Review - Based on the information put together by both the loan executive and the processor, the underwriter makes the final decision regarding whether or not a loan is approved.
11.
Mortgage Insurance - Many lenders require private mortgage insurance when borrowers put down less than 20 percent on a loan.
12.
Approval, denial or counter offer - In order to approve a loan, the lender may ask the borrowers to put more money down to improve the debt-to-income ratio. The borrower may also need a bigger down payment if the property appraises for less than the purchase price.
13.
Insurance - Lenders require fire and hazard insurance on the replacement value of the structure. Flood insurance will also be required if the property is located in a flood zone. In California, some lenders require earthquake insurance on condominiums.
14.
Signing - During this step, final loan and escrow documents are signed.
15.
Funding - At this point, the lender sends a wire or check for the amount of the loan to the title company.
16.
Confirmation of Recording - The lender authorizes the disbursements of loan proceeds.
17.
Close of Escrow - Documents transferring title will now be recorded with the County Recorder.
18.
Buyer Begins Making Mortgage Payments
I'd be happy to discuss any of these steps in more detail with you or your clients.
6. Not getting Mortgage Pre-approval - Pre-Approval is fast, easy and free. When you have a pre-approved mortgage, you can shop for your home with a greater sense of freedom and security, knowing that the money will be there when you find the home of your dreams.
7. Contract Misses - If a seller fails to comply with the letter of the contract by neglecting to attend to some repair issues or changing the spirit of the agreement in some way, this could delay the final closing and settlement. Agree ahead of time on a dollar amount for an escrow fund to cover items that the seller fails to follow through on. Prepare a list of agreed issues, walk through them, and check them off one by one.
8. Hidden costs - Make sure you identify and uncover all costs - large and small far enough ahead of time. When a transaction closes, you will sometimes find fees for this or that sneaking through after the "sub" total fees such as loan disbursement, underwriting fees etc. Understand these in advance by having your lender project total charges for you in writing.
9. Rushing the Closing - Take your time during this critical part of the process, and insist on seeing all paperwork the day before you sign. Make sure this documentation perfectly reflects your understanding of the transaction, and that nothing has been added or subtracted. Is the interest rate right? Is everything covered? If you rush this process on the day of closing, you may run into a last minute snag that you can't fix without compromising the terms of the deal, the financing or even the sale itself.
Working with a professional and knowledgeable lender can help you avoid these pitfalls. I look forward to earning your business and being a resource for you.
No matter which way you look at it, buying a home is a major investment. But for many homebuyers, it can be an even more expensive process than it needs to be. Let me share with you the 9 most common and costly of these homebuyer traps, how to identify them and what you can do to avoid them.
1. Bidding Blind - What price should you offer when you bid on a home? Is the seller's asking price too high, or does it represent a great deal? If you fail to research the market in order to understand what comparable home are selling for, making your offer would be like bidding blind. Without this knowledge of market value, you could easily bid too much, or fail to make a competitive offer at all on an excellent value.
2. Buying the Wrong Home - What are you looking for in a home? A simple enough question, but the answer can be quite complex. More than one buyer has been swept up in the emotion and excitement of the buying process only to find themselves the owner of a home that is either too big or too small. Maybe they're stuck with a longer than desired commute to work or a dozen more fix-ups than they really want to deal with now that the excitement has died down. Take the time upfront to clearly define your wants and needs. Put it in writing and then use it as a yard stick with which to measure every home you look at.
3. Unclear Title - Make sure very early on in the negotiation that you will own your new home free and clear by having a title search completed. The last thing you want to discover when you're in the back stretch of a transaction is that there are encumbrances on the property such as tax liens, undisclosed owners, easements, leases or the like.
4. Inaccurate Survey - As part of your offer to purchase, make sure you request an updated property survey which clearly marks your boundaries. If the survey is not current, you may find that there are structural changes that are not shown - be very clear on these issues.
5. Undisclosed Fix-ups - Don't expect every seller to own up to every physical detail that will need to be attended to. Both you and the seller are out to maximize your investment. Ensure that you conduct a thorough inspection of the home early in the process. Consider hiring an independent inspector to objectively view the home inside and out, and make the final contract contingent upon this inspector's report. This inspector should be able to give you a report of any item that needs to be fixed with associated, approximate cost.
After you have been through the mortgage application process and you have been pre-approved, here are some no-no's to steer clear of:
1) Do not take on any new debt - The temptation is strong. There are so many big purchases that people want to make in connection with a move: appliances, window treatments, furniture, etc. When you add to this the fact that, today, everyone offers easy terms and no money down -well, why not just do it? Answer: Because you will change what the mortgage industry calls your "debt-to-income ratios" (the relationship of your income to your debt).
2) Do not change jobs - If at all possible, try not to make a career move during the time between your mortgage application and the closing on the home you are purchasing. But, you ask, "What if it is a BETTER job, for MORE money in a DIFFERENT field? Still, try and wait until AFTER closing. One of the factors mortgage companies consider is length of present employment, they are partial to stability. At the very least, changing jobs initiates the need for more paperwork, and may delay your closing.
3) Do not pack too soon - Well go ahead and pack your clothes and dishes - but do not pack your bank statements, tax returns or other important paperwork. Most especially, do not pack your checkbook! More than one buyer has had closing delayed while a friend or relative hurried over with additional funds because the checkbook was in the moving van.
4) Do not lease or buy a new car - This should go under the general heading of "no new debt" -but it is highlighted here because for some strange reason, many buyers do run right out and get new cars during the time between mortgage application and closing. As with any debt, this will change your "debt-to-income ratios" and may cause you not to qualify for your mortgage.
In short, do nothing that negatively impacts your ability to qualify for your mortgage loan, or initiates a new round of paperwork. If you have any doubts about doing something that may affect your ability to qualify for your mortgage loan, please consult your loan provider before you do it.These suggestions are merely that - suggestions. No one is saying, flat out, that bad things will necessarily follow if you do any of the above. They are offered as cautions. Many buyers seem to view the mortgage application procedure as a static action, a snap shop of their financial lives at a given moment in time. It's not. It's an on-going process that takes into account everything you do right up until the day of closing.
If you have any financial questions - please give me a call at (509) 217-0907
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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