Pursuing a divorce amidst a global pandemic? Trying to retain ownership of the marital home and buy out your Ex? Surely, the Banks will go easy on you with lending guidelines, right? Not a chance.
It’s been said that Banks will give you an umbrella when it’s sunny, then ask for it back when it rains. Translation, not only will Banks “not make it easy” when you are applying for a new loan under these conditions, but they will actually make it more difficult. Sadly, in many cases, perhaps the Borrower will make things more difficult on themselves unintentionally.
Below are a few examples of how the dynamics of divorce amidst a global pandemic can wreak havoc on a borrower shopping for a new mortgage loan (even if that loan is solely intended to allow the divorcing homeowner to maintain ownership of the marital home while buying out their ex-spouse).
- Late payments – 35% of your credit score is influenced by late payments. Quite simply, pay your debts on time each month and you will get an A+ grade on 35% of your score. If you do not pay them on time, the credit scoring model looks at 3 things:
- Recency – how long ago were you late?
- Frequency – how often were you late?
- Severity – how late were you?
- NOTE: Recency measures your “momentum” (or lack thereof) and thus carries the most influence on your score (recent late payments can drastically reduce your credit score)
- Increasing credit card balances – oftentimes amidst a breakup, household income levels drop and/or expenses increase (especially if Attorney fees are paid via credit card). The balances on your credit cards divided by the balances equals your “credit utilization” on each credit card. The higher the utilization, the more it can hurt your score. This equation accounts for a whopping 30% of your credit score and can hurt your scores (even if you pay all of your debts on time)!
- Forbearance on your existing mortgage can be detrimental to your ability to qualify for any new mortgage loan right away. Ignore the media and the politicians who declare that there are no negative ramifications for forbearances…NOT TRUE!
- Over 40 million people filed for unemployment in 2020…many others were temporarily furloughed and/or accepted reduced hours/wages…were you one of them? If so, there may be a chance the income you currently earn will be calculated lower.
- Back to work – if you have been out of the workplace for the past 6+ months, you will likely need to reemerge back into the workforce for a minimum of 6 months in order for your income to be used (NOTE: additional restrictions may apply for part-time, commission/bonus and/or independent contractors)
- Hoping that help from the government during COVID-19 from the Paycheck Protection Program (PPP) and/or the Economic Injury Disaster Loan (EIDL) will help you “show more income” on your loan application? Sadly, this income will not help (and can even hurt if there are repayment terms)
- Many Lenders temporarily pulled back on the amount of equity you can tap into when accessing a “cash out” refinance mortgage, or Home Equity Lines of Credit and/or Loans
- Did you know that depending on how you structure your divorce settlement, there may be a way to access more equity to provide to your ex-spouse?
- Divorce Negotiations
- Alimony/Child Support
- If you are paying it, this amount will count against your debt-to-income (DTI) ratio and may limit your ability to qualify for a new loan
- If you are receiving it, there are stipulations in order to use this income on your mortgage application. In short, you need at least 6 months of on-time and in-full payments (to demonstrate “stability of receipt”) followed by at least 36 months of continuance (to demonstrate this income will last for a minimum period of time). There are many additional details on this topic!
- Contingent Liabilities – If your court order specifies that one spouse will assume full responsibility for a joint loan (i.e. car payment), although the debt will ultimately not count against the non-responsible Borrower from a “debt-to-income” (DTI) ratio perspective, any failure by the responsible party to pay that debt on time will prompt the existing Creditor to report the late payment on the credit reports for BOTH Borrowers.
We’ve all heard nightmare stories of what can happen when someone gets advice from the wrong person. In a divorce equity buyout, the stakes can be high. There are specialized professionals in both the Mortgage and Real Estate industries who have acquired knowledge specific to help with these dynamics. During this significant transition in life, I highly recommend consulting a Certified Divorce Lending Professional (CDLP) for any residential mortgage questions, and a Certified Divorce Real Estate Expert (CDRE) for any residential real estate questions.