Recently, I was contacted by a new client that was separating from her husband. Prior to filing for separation they decided to amicably split and split the proceeds from the sale of their existing home. They agreed that since they had no children and he had supported her through her schooling, he would not pay her alimony. The amicable split helped them protect their credit score as the credit score will usually take a hit, when you divorce or separate.
Divorce or separation can have a major impact on both your personal and financial lives. Where you might have previously had joint accounts for major expenses like your mortgage or loan payments, now you will have your sole accounts. Furthermore where you had two incomes you now have one income.
Divorce or separation is not necessarily a death sentence on your credit score, but where it can be impactful is if your former spouse took out a secured loan against your matrimonial home, you are also liable for payments.
My client had found a new home to buy and had waived financing as she was scared of losing out on the home, having lost out to bidding wars in previous offers. She had gone to the bank and had mistaken their pre-qualified for pre-approved. I have spoken about this before.
Pre-qualified is when the bank will punch in a few numbers and do a best-guess estimate of what you qualify for. While pre-approval entails a full underwriting to ensure you can qualify for the amount you want to purchase.
When I met her she was at the stage of selling her home and had planned to put down 30% towards the purchase. When I underwrote her deal to get her an approval, unfortunately, while her beacon score was above 800, her income was low and her debts were higher due to the joint accounts she still had with her spouse. The proceeds from the home would pay these off but unfortunately her income was too low to put her debt ratios in line for an A lender.
She would either need a higher downpayment – one she could not afford or go with a B lender with higher debt ratio thresholds but also with much higher rates and in most cases lender fees.
She was angry and for good reason! She did not realize the number of accounts that were joint with her ex-husband, and how it ultimately impacted her ability to get approved. While his income was higher than hers and he could afford it, she unfortunately could not!
Had she obtained a pre-approval prior to putting an offer on the property and waiving financing, she would have realized that she would have to purchase something she could afford rather than something she could not, which cost her a higher interest rate because she was forced to go to a B lender.
Always speak to your mortgage broker before hand – it could make the difference in being approved for what you can afford rather than being forced to take a rate you cannot afford!