After divorce, you’re ready to start writing your next chapter. You’ll surely put together a beautiful storyline, which, of course, includes a remarkable setting (AKA your new home).
But, you probably have several questions about purchasing a home post-divorce. We’ve turned to some experts to help you navigate this decision process.
1. Come up with a storage solution
Selling a home and closing on the next doesn’t usually line up magically. Oftentimes, you’ll need to rent for a few months in between or temporarily stay with family. If you plan to rent, avoid signing a year-long lease and, instead, find a place that allows you to rent month-to-month at a reasonable rate. (Pro tip: Look for apartment complexes that have ‘corporate housing’ rentals because they’re accustomed to these types of short-term rental agreements). To help make the moving process go smooth, group together moving boxes of essentials (like seasonal clothing, bed sheets, basic cooking supplies and small appliances). Then, let Closetbox take over. The team will pick up your boxes and furniture for free and store your belongings until you move into your new digs. The Closetbox team will return your items when you’re ready, making it a seamless process.
2. Get realistic during the pre-qualification process
It’s not unusual to see expenses increase, while income stays the same or even declines post-divorce, says Donna M. Cheswick, a Certified Divorce Financial Analyst, or CDFA. This is especially true for the spouse who is the lower wage earner, she says. “Prior to shopping for a home, talk to a mortgage broker to go through the pre-qualification process to find out what you can realistically afford,” Cheswick says. Since mortgage brokers deal with a network of lenders, they can help you find a loan with the lowest possible interest rates and fees.
3. Just put down 20 percent
When it comes to the down payment, it might a good idea to put down 20 percent to avoid the private mortgage insurance, Cheswick says, but not necessarily more. Finance the remainder. “Many times, individuals want to use a sizable chunk of the cash or assets they receive from their settlement toward the new home,” Cheswick says. “However, they then run the risk of being ‘house rich and cash poor.'” Freeing up some income will ensure you have enough money available to cover your utilities, mortgage payments, taxes, homeowner’s insurance and other expenses, Cheswick says. After you’re in the new home for six months to a year, you’ll have a clearer sense of what your expenses are, and you can always make additional payments toward the principal if your situation allows, she says.
4. Know your debt-to-equity ratio
When it comes to purchasing a home post-divorce, problems can arise if you and your former spouse both still own your marital residence. “If one party is still encumbered by the existing mortgage, it could make them ineligible to purchase another residence because their debt-to-equity ratio could be too high,” Cheswick says. “Certainly the time to find that out should before finalizing the divorce—not after!”
5. Budget for annual maintenance
Staying on top of small tasks can help save you from expensive fixes and repairs down the line, reminds John Bodrozic, co-founder of HomeZada. The digital hub helps homeowners manage all of the important information about their homes, including dashboards to help you measure your home values and household expenses as well as a component that helps you manage a remodel or design project. Typically, you’ll want to budget about 1 to 4 percent of the purchase price of your home for annual maintenance and repair costs, Bodrozic says. Although, the size of your house and property, as well as its age, can have a big impact on that figure, he says.
6. You can still buy if you’ve been a stay-at-home parent
Mortgage underwriters look for stability and a steady source of employment and income. Typically, they want to see a continuous two-year work history, says John Snell, Certified Divorce Lending Specialist. But, if you’ve been a stay-at-home parent, you can take advantage of an exception in the two-year requirement by having a current six-month history of full-time salaried or hourly employment as long as the underwriter can verify a previous two full years of employment, says Snell. That means it’s OK if you have a gap between your previous employment and current employment. “I have gone back as far as 10 years to verify previous employment,” Snell says. “Fortunately, the company was still in existence.” Also, hold on to W-2’s as they can verify past employment.
7. Consider a smaller home
Take advantage of your fresh start by buying a smaller home, suggests Cedric Stewart, a residential and commercial sales consultant and team leader of Entourage RG at Keller Williams in the Washington, D.C.-area. “This is a chance to buy a smaller home or condo in an area with healthy sales activity and better resale values,” he says. “That way, you’ll have more options should you choose to rent or sell in the future.”
8. Consider renting first if you need to rebuild credit
Circumstances surrounding divorce could impact your credit score, Stewart says. “If a spouse didn’t fulfill their obligation and cause one or more mortgage payments to be late, it affects the credit of everyone on the loan,” he says. “If your home is underwater and you had to do a short sale, it could have a similar impact.” If you need to rebuild your credit, consider renting for a short time after the divorce, Stewart says. That way, when you’ve improved your score, you’ll be better positioned to purchase a home at a lower interest rate.