Simply The Best Loans

Few people go into a marriage with thoughts of what they need to do once the marriage is culminating in divorce, unfortunately, in most cases that’s exactly what they should do. Statistics show that more than 50% of all marriages end in divorce. While there are numerous issues that have to be addressed when a marriage is ending, since a home and its mortgage are most couples’ biggest financial commitment, it is one of the most important.

For those that haven’t faced this situation before, let me clear up a couple of common misconceptions:

If the mortgage is in both names, both parties are fully responsible for the payments. Even if the decision is made for one party to accept responsibility for the payments while going through the divorce process, whether through a verbal agreement, a legal separation agreement or by court order, should that party not make the payments timely, it will affect the credit of both. Lenders do not overlook late payments reported on a mortgage or any other credit line just because you have an agreement, even if legally binding, stating your estranged spouse is responsible for the payments. If the credit is joint, you are 100% accountable for the debt and that’s the way the lender views it.

I’ve had more than one client attempt to purchase a new home after going through a divorce only to discover their credit has been severely damaged due to their former spouse’s late payments on their old marital residence mortgage. The best advice I can offer is to personally check each month, even after payment responsibility has been assigned to the other party, to ensure the payment is timely. While it may be a tremendous financial burden, if you find the other party has not made a payment timely, make it yourself before the payment can be reported as 30 days late. In the long run, it can mean the difference between maintaining your good credit history over having credit that is too damaged to allow you to qualify for another mortgage.

Lenders can repeat credit checks at anytime before a loan closes even after loan approval for certain terms has been given.

Many individuals facing divorce don’t want to wait for it to be final before attempting to purchase another home. Often individuals in this situation want to quickly re-establish a home for themselves and/or their children. One common assumption is that when a lender checks a borrower’s credit at the time the loan is submitted and outlines the terms they are willing to offer, the borrower doesn’t have to worry that something derogatory might show up on their credit later. Unfortunately, many lenders routinely pull credit again, just prior to closing. If the credit scores have dropped at all or late payments, previously unknown, appear, the lender can deny the loan or change the terms. There is nothing worse than being a day away from closing and getting a call from the lender saying that they are denying the loan or raising the interest rate or increasing the required down payment amount or some combination thereof.

The best course of action for anyone, regardless of their personal situation, is to make sure they are careful to maintain their credit history while they are going through the mortgage process. Make sure to pay all bills on time and avoid applying for any new credit during the process. Then if the lender does pull a new credit report 2 days before closing, the new report should be the same and the lender will have no cause to change the terms of the loan.

Again, there are no easy answers when a marriage is ending, but, with the help of a qualified legal advisor, some issues can be resolved easily by considering one or several of the following options:

1. The spouse that has agreed or been ordered to make the mortgage payment can refinance the mortgage into their name solely, thus eliminating the joint mortgage account and risks associated with it.
2. Close out any other joint accounts immediately ensuring that each individual’s history is protected from activity of the other.
3. If the above are not options for any reason, each party should personally check that any joint accounts are being kept current. If a delinquency is discovered, make sure the payment is made, even if you have to wait to recover the money from the responsible party later. Protecting your credit is paramount.

Armed with the knowledge of how to avoid potential financing and credit pitfalls when going through a divorce can mean the difference between a positive credit history and a poor one. A poor credit history can impact your finances and credit options for a long time after the divorce is final.

This entry was posted on Tuesday, July 4th, 2006 at 7:58 am and is filed under Consumer Alerts, General Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.