Managing living arrangements during a divorce is tough and is typically the first item on the to-do-list as a divorce moves forward. Determining who is going to keep the house, where someone is going to live and where the money is going to come from are heightened points of contention among spouses. To minimize stress, conflict and provide a healthy atmosphere for children, it is imperative to solve this issue quickly.
Various living arrangement options exist such as renting or living with family or friends for a temporary period. However, many individuals do not want to burden friends and families, feel as though they are throwing away money renting in a surging real estate market, which in turn leaves many soon-to-be-divorcees with one option - purchasing a new residence. Before searching the internet and talking with your best friend’s sister who is a real estate agent, read through these tips to save yourself some much needed energy and time:
Have Divorce Papers Been Filed?
If a divorce petition has been filed to start the process, the relationship status on a mortgage application must be listed as ‘separated’ and not married regardless of if you still reside together in the marital home. Therefore, your spouse’s income will not be included or taken into consideration. In cases where one spouse does not have enough working income to qualify for a mortgage this can present a problem in the home purchasing process as the higher earning spouse’s income will not be involved. A written separation agreement outlining the amount and terms of spousal and child support will be required for loan purposes.
Completing an application as married instead of separated when divorce papers have been filed can put yourself at significant risk of having your loan fall through and prove to be a waste time and energy when it could have been utilized more effectively elsewhere.
What is Your Income for Mortgage Purposes?
Earned income from employment qualifies depending on how long you have been employed. If you have been unemployed for several years while taking care of children at home and recently gained employment it is important to speak with a Certified Divorce Mortgage Lender to determine the length of employment required for loan purposes.
For spousal and child support to qualify as income, the receiving spouse must receive payments for 6-months before income can be considered. Often times support payments don’t begin until shortly after a divorce is finalized therefore the divorce timeline itself is an additional waiting period to get through before the 6-months of receipt can be accomplished. After which time an additional minimum of 3 years of future support payments are required to qualify as income. That translates into a bare minimum of at least 3.5 years of support required at the time a separation agreement is written (time periods can vary depending on the type of loan such as FHA, VA, Conventional or Jumbo – make sure to inquire and plan accordingly).
Support payments are considered debt obligations and funnel into an individual’s debt-to-income ratios.
Emotions & Future Financial Plans
Emotion and stress levels are at extreme levels during this time. Individuals look for a quick fix and overlook long-term considerations during the decision-making process.
Owning a home involves more then just a mortgage payment; there are significant maintenance costs such as painting, new roofs, landscaping, lawn services, snow removal and replacing all those pesky items that seem to constantly need attention. Rising home values are pushing real estate taxes higher and thus insurance costs year-by-year as the Denver metro area is expanding rapidly.
Furnishing a home can drain bank accounts and or push higher debt levels. Re-entering the workforce can create additional expenses like transportation, wardrobe, eating out, daycare, etc. Children grow up and have cells phones, drive cars that need to be insured and may become involved in more costly activities.
Time will move forward, and just like any budget expenditures move upward unless an individual is proactively chopping costs. Even if support is awarded for what is considered a long-period of time (7+ years) most do not increase for rising expenses. Inflation of 3% per year causes living expenses to rise 23% cumulatively over 7 years and 34% in 10 years. For example, a support award of $2,000/month (after-tax) in today’s dollars would only be worth $1,540 in 7 years or $1,320 in 10 years – a huge difference! It is imperative to leave ample room in your budget to achieve long-term financial stability and independence especially with financial commitments such as a mortgage.
The best financial advice during this living transition is patience or temporary living arrangements until permanent details are settled upon (if there is any form of abuse, safety should be of utmost and primary concern). Qualifying for a mortgage in-and-of-itself does not determine if you can or should purchase a home. Trying to purchase a home without having agreed upon future income or obligations in the form of spousal and/or child support could be financially reckless. Divorce proceedings often turn and twist, changing direction and expectations on a whim. Financial education and planning regarding your complete financial future during this process is imperative to establish a strong financial foundation for your tomorrow.
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Disclosure: Divorce transition/financial planning services offered by A.M. Financial. Investment advisory services offered through WealthSource Partners, LLC ("WSP"). A.M. Financial and WSP are independent and unaffiliated entities. The statements and opinions expressed are those of A.M. Financial and Amy Mahlen and do not represent the views and/or opinions of WSP or any other associated or affiliated person of WSP. Furthermore, the statements and opinions expressed are for informational and educational purposes only and should not be construed as legal, tax, accounting or investment advice. All statements and opinions are current only as of the time made and are subject to change without notice.