Jill walked out of the lender’s office with the crash of her collapsing dream ringing in her ears. “I’m sorry, but you just don’t qualify for this home,” her loan officer had informed her.
What happened! She had good credit. She’d done the math. She could afford the payment. This was the perfect house for her and the kids, and now it was going to slip away.
Jill’s situation is common. And it’s avoidable. Divorce affects your mortgage loan application with a specific set of guidelines. The good news is you can do several things before, during, and after your divorce to keep your borrowing ability intact.
BEFORE your first meeting with your attorney/mediator:
• Get a copy of your joint credit report from all three bureaus (Equifax, TransUnion, and Experian) at the FCC-approved website www.annualcreditreport.com. These will be separate reports from each bureau. You can get a combined report from a fee-based site such as www.creditreport.com.
• List all debts, account numbers, and the asset secured by the debt, if applicable.
DURING the divorce process:
• When listing and dividing debts, use complete information. Vague language such as “Petitioner is responsible for the following indebtedness: her Visa, her Citibank, and her Atlantic Bank accounts…” creates havoc when you have two Visa cards, three Citibank cards, and two loans with Atlantic Bank, all of them joint. You may understand which accounts you were talking about, but an underwriter won’t. Clarify!
• Consider the fact that you may be getting divorced, but your credit can still be married. Joint debt activity is reported on both you and your spouse’s credit report until the debt is paid off and the account closed, or refinanced into one name. Bad news for the non-responsible party if late payments occur. The damage to your credit score could cost you a loan approval. Ugly, but true. If possible, eliminate joint debt.
• Monitor joint accounts by agreeing on access until they are paid off, closed or refinanced. Internet access is convenient, but not always possible. Inform creditors without websites of the situation. Request both parties be notified in case of delinquency. Better to cough up the payment on an account that your ex can’t pay this month, than risk finding out later that your credit score is trashed.
• When listing children, include birth date. This will save you the hassle of providing birth certificates at loan application. Age determination is important. Guidelines allow child support income to be included only when it will continue for the next three years. In most cases, this is until the child turns 18 or graduates from high school, whichever happens last.
• Trying to qualify and close on a home during the divorce? Most lenders will require a legal separation agreement, especially if there are minor children. They want something from the courts to get an accurate picture of potential debt division, alimony, and child support payments. If you are planning on using income awarded you in the agreement, you must provide a well documented history of receiving the income for a period of 3-12 months, depending on the lender’s requirement. If you can’t, you may be out of luck.
AFTER the divorce:
• Make sure you both have copies of tax returns for the last three years and copies of the signed divorce decree and any other important documents (i.e., bankruptcies, birth certificates, etc.)
• Again, create a paper trail of alimony and child support income if you plan on using it to qualify. Payments made to you by cash or check should be deposited in your bank account. Don’t “hold back” money from the deposit or pocket the cash. Deposit the entire amount and then withdraw funds afterward. Records from your local Child Support Enforcement authority can be used as well.
• Payers of alimony and child support: Be aware that a verbal agreement to decrease payments will not help you decrease debt on a loan application. If changes are not documented through the court or the Child Support Enforcement authority, the original payments declared in the decree will apply.
Like them or not, those are the rules and realities of mortgage lending. Divorce is difficult enough without getting caught in a technicality trap that you could have side stepped with a little planning and knowledge.
TRACEY RUMSEY is a loan officer and a Division of Real Estate instructor in Bountiful, Utah. She can be reached at: [email protected] Her website is: www.traceyrumsey.com.