It’s no secret that the housing crisis caused difficulty in obtaining a mortgage. Even dual-income, married households find it much more challenging to jump through the hoops towards home ownership. This challenge to home ownership can seem nearly insurmountable to persons who are single, divorcing, or divorced. If you are subsisting on only one income, or you expect to in the near future, pursuing home ownership will absolutely require a demonstration of financial stability and a decent credit score.
People trying to purchase a home will be often asked “Maybe you can’t afford a home if you can’t obtain financing.” However, this couldn’t be further from the truth. Rent is high in the State College area, and obtaining a mortgage for a home will commonly equal a rent payment for an equivalent living space. Add to that the bonus of locking in a mortgage rate and payment for the next fifteen or thirty years, and obtaining a mortgage appears to be a financially sound decision.
There are numerous complications you can run into if you are single, divorced, or divorcing, and trying to obtain mortgage financing. A few of the common issues are the following:
· Child Support: Can you use child support as income to qualify for a mortgage? The answer depends on the situation. If you are receiving child support, you will have to persuade your bank it is a source of continuing income you have been receiving, and that you will continue to receive it for a considerable length of time.
· If you receive child support for older children, who may be 15 or 16 years old, for example, you will probably not be able to use most, if not all, of your child support as income to help you qualify for a mortgage. The reason would be because the bank would recognize that this income would cease in the near future, and would therefore not help you make regular mortgage payments.
· If the amount of your child support constantly changes, perhaps because of late payments or petitions to modify the support, your bank will feel it cannot determine what amount you will actually receive each month to assist you in paying your mortgage. Thus, your bank will be reluctant to count your child support as income in order to qualify for a mortgage.
· Job Continuity: Have you had several jobs in the past few years? This could lead to difficulty in securing a mortgage. Routinely, a parent stays at home with young children, and if that parent becomes separated, he or she may obtain a new job. Or, alternatively, a parent separating from their spouse must obtain different employment with a higher salary or more flexible schedule.
Banks want to be sure you have a secure source of income, because they believe this lessens the chance you will default on your mortgage. Maintaining the same employment for two or more years can be the difference between receiving a mortgage or not. Periods of unemployment here and there, even if you still pay your bills on time and have a good credit score, can end the opportunity for a mortgage.
· Consistent Credit Score: Keeping a good credit score throughout your mortgage process is vital. You need a good credit score to qualify for a mortgage loan, and you need to maintain a good credit score up until the day your close on your mortgage. Banks can and will pull your credit report again right before you are scheduled to close on your mortgage. Below is some advice on how to maintain a good credit score until closing:
· Avoid major purchases before closing on your mortgage. If you, as an example, purchase a washer and dryer on your regularly-used credit card, even if the purchase occurs after receiving a commitment letter from your bank, the much-higher balance on your credit card will be reflected on your credit report. This will make your bank wary, and could result in a delay or cancellation of your mortgage. Therefore, it is best to refrain from major purchases before closing on your mortgage.
· Avoid pulling your credit report and/or opening new credit before closing on your mortgage. Opening new credit or having your credit report pulled will cause your bank concern. The bank will view this as an attempt to increase your debt, and increasing your debt would make it more difficult to pay your mortgage. Waiting until after closing to obtain new credit or have your credit report pulled is the smartest course of action.
· Keep your credit card balance low before closing on your mortgage. It is best to have your credit card balances stay under 30% of your total available balance, and even better to keep it under 16%.
· You should also be aware that your minimum monthly credit card payments, along with other regular monthly payments, are counted toward your ‘debt to income ratio’. This ratio is determined by dividing your debt with your recognized sources of income. Your ‘debt to income ratio’ cannot surpass a percentage of your income in order to qualify for your mortgage. The amount of the allowable percentage depends on the type of mortgage you wish to qualify for. Thus, if you are dangerously close to the highest possible ‘debt to income ratio’ for the type of mortgage you want, and your monthly credit card payments rise from $20.00/month to $75.00/month before closing, this could affect your ‘debt to income ratio’ and prevent you from securing a mortgage.
· Unresolved Divorce Issues: Did you file for divorce? Are you thinking about filing for divorce? If you want a new mortgage, then be careful. Your bank will find out if you are a party to an unresolved divorce.
· If you are a party to an unresolved divorce, and you want a new mortgage, then you may want to consider settling your divorce before beginning the mortgage loan process. If you have not resolved your divorce, your bank cannot be sure whether or not you will be financially tapped through a marital settlement agreement, a court order, or unexpected litigation in your divorce. Having your divorce settled will ease your bank’s concerns that you will not be required to pay your soon to be ex-spouse a large monthly alimony payment, for example. If that were to happen, it would clearly affect your ability to afford a monthly mortgage payment.
· Often, a spouse will separate from their partner but wait to file for a divorce, perhaps for financial reasons, or perhaps due to procrastination. Filing for divorce before closing on your mortgage could have a detrimental impact on your ability to obtain the mortgage. However, every person’s overall circumstances are unique, and discussing your particular situation with a licensed professional is probably your best course of action, if you find yourself in this situation.
If you are single, separating, divorcing, or a single parent, and you are trying to obtain a mortgage, proceed with caution. Home ownership can be a dream come true, but the road to home ownership can quickly turn into a nightmare given the wrong circumstances.
This article is not intended to provide legal advice for any specific legal situation.