Due to the housing crisis over the past decade, it’s much more difficult to obtain home ownership for the average American. This difficulty is compounded when a single, divorcing, or single-parent household is attempting to achieve this American Dream. If you are surviving on only one income, or expect to in the near future, financial stability and a good credit score is crucial, especially when you wish to pursue home ownership.
This can seem like an injustice – after all, rent can be high in the State College area, and often families are better off owning a home and paying a mortgage than making rent payments which can frequently match or exceed a monthly mortgage payment. However, tightened regulations are in place, and there’s little you or I can do about it.
The number of issues a single or divorcing individual can run into when trying to obtain mortgage financing are too numerous to mention in one article. However, I would like to highlight common issues these people face when trying to obtain home ownership:
Child Support: Can you use child support as income to qualify for a loan? The answer is yes – and no. Generally, if you are collecting child support, you will need to convince your bank that this is a source of stable income you have received for a considerable length of time, and that you will continue to receive it in the future.
If your children are ages 16 and 17, and you receive child support for them, there is a good chance you will not be able to use all, or even any, of your child support as income to qualify for a loan. This is because due to the ages of your children, child support will likely end soon.
If your child support amount continuously changes, due to the filing of petitions to modify by either party, it can be difficult for your bank to ascertain exactly how much child support should be counted as your income, since the amount never remains steady.
Job Security: Do you switch from job to job? This is another factor which can make it difficult to obtain a mortgage. Often, a parent may have stayed at home with young children before separating from his/her children’s other parent, and have only newly acquired employment. Or, as is often the case, a person going through a separation from their spouse must obtain higher-paying employment (if possible) or employment with a more flexible schedule, and thus switch their employment.
Banks want to be assured that you will be continuously tied to a reliable source of income, so there is less chance that you will default on your loan. Holding the same job for a couple of years can make the difference between qualifying for a loan or not. Bouts of unemployment here and there, even if you are still able to pay your bills on time, can be fatal to your loan process.
Credit Score: Maintaining a good credit score throughout your mortgage process is crucial. Not only will you need to have a good enough credit score to qualify for a loan, but you will also need to maintain good credit up until the day of closing. Banks can and will pull your credit report again immediately before you are scheduled to close on your loan. Here are a few tips to maintaining a good credit score:
Avoid purchasing any big-ticket items before you close on your house. If you, for example, purchase a washer and dryer on your credit card, even if you do so after you have a commitment letter from your bank, this major purchase will appear on your credit report as a much higher balance on your credit card. This will make your bank extremely wary, and could result in a delay or even a cancellation of your loan. It is always best to hold off on any major purchases before your close on your house, to be safe.
Avoid opening any new credit accounts, or having your credit report pulled, before closing on your house. Opening new credit or having a potential creditor pull your credit report will cause your bank concern. They will see this as an attempt to expand your debt, which could make it difficult for you to pay your mortgage. Waiting until after closing to have another creditor pull your credit, and waiting open any new credit accounts, is the wisest course of action.
Do not allow your credit card balance to become higher before closing on your house. In my opinion, it is always best to have balances on your credit cards stay under 30% of your total available balance. Under 16% is optimal.
Also be aware that the monthly payment you are obligated to make on your credit card, along with other monthly payments, is counted toward your ‘debt to income ratio’ – a ratio calculated by determining the amount of your total debt as compared to your total amount of income. Your debt to income ratio cannot exceed a certain percentage of your income in order to qualify for your loan. That percentage depends on the type of loan you are attempting to qualify for. Thus, if you are dangerously close to the highest possible ‘debt to income ratio’ you can have to qualify for your loan, and your monthly credit card payment increases from $15.00/month to $60.00/month before closing, this could greatly affect your ‘debt to income ratio’, and could prevent you from obtaining financing.
Outstanding Divorce Issues: Are you currently going through a divorce? Are you thinking about filing for divorce? Be careful. Banks can and will find out if a divorce has been filed, and can also find out if your divorce has been resolved or not.
If a divorce has been filed, but hasn’t been resolved, you may want to consider settling it if possible. With an outstanding divorce filed, banks cannot be sure whether or not you will be financially drained through a marital settlement or further litigation in your divorce. Having your divorce settled will ease their concerns that you will not, for example, be ordered to pay your spouse $750.00/month in alimony for the next ten years. Such an instance would clearly affect your ability to pay your mortgage.
Sometimes, a spouse will become separated from their partner but will wait to file for a divorce, perhaps for financially strategic reasons, or perhaps simply due to procrastination. Filing for divorce before closing on your loan could have a detrimental impact on your ability to obtain the loan. However, every person’s situation is unique, and running your particular situation by a qualified professional is probably necessary in this situation.
In conclusion, if you are single, separating, divorcing, or a single parent, and you are trying to own a home, be careful. Home ownership can be a dream come true, but can quickly turn into a nightmare if not done correctly.
This article is not intended to provide legal advice for any specific legal situation.