Dos and Don’ts for Buying a Home after Divorce
Now that you’re single, perhaps you’ve begun to think about buying a new home, apartment or condo. But unless you have the funds to pay for the purchase outright with cash, chances are you’ll need a mortgage. Until recently, getting approved for a mortgage was a pretty straightforward and easy process, especially for someone with average or better credit, a good paying job, and enough money for a down-payment to cover 20 percent of the purchase price. Even without being able to show a steady income, possessing a below average credit score, or not having the funds for a down payment, it was still possible to get approved for a mortgage.
With recent changes and dips in the real estate marketplace and mortgage industry, however, getting that all-important approval has become a significantly more difficult process. Today, if you want to obtain a mortgage, having a good credit score is a must. Being able to show a stable income and being able to cover a 20 percent down payment is also helpful.
Assuming you meet a lender’s approval criteria, you still need to determine if, from a financial standpoint, owning a home, apartment or condo is a more viable option for you than renting. This is a question an accountant or financial planner can help you answer, based on your unique situation. If you’ll be getting remarried within two or three years, for example, buying a small home, apartment or condo that you’ll ultimately wind up selling might not make financial sense for you right now. Prior to pursuing a mortgage and shopping for a home, you’ll want to consider the following:
What’s Your Score?
Your credit score and the information on your credit report. Is your credit score high enough for you to obtain an approval in today’s market? If your score is in the high-600s or better (ideally in the mid-700s), you should be in good shape. You can show a steady income and be able to provide tax returns, W-2 forms and/or pay stubs that document your income, investments, and assets. You have enough savings to afford and down payment, plus cover the costs of purchasing a new home. You’ll be able to cover the ongoing costs of ownership on a month-to-month basis, including your mortgage payment, insurance, real estate taxes, utility bills, maintenance, repairs, and homeowner’s association/condo fees (if applicable).
Rent or Own?
From a financial standpoint, there are many reasons why it’s better to own a home, as opposed to renting. For example, as you make your monthly mortgage payments, you’ll be building up equity in your home and increasing your overall net worth. Making monthly rent payments to a landlord is simply making that landlord richer, but not providing you with any financial benefits. You’ll also receive significant tax breaks as a homeowner with a mortgage. The interest you pay on your mortgage each year is tax deductible.
Once you’ve purchased your home and have acquired a fixed rate mortgage, for example, your housing costs will remain constant for the life of the loan. If you’re paying rent to a landlord, you could have to deal with annual rent increases. The best incentive for purchasing a home is that hopefully, over time, its value will increase. When you’re ready to start the home-buying process, following these strategies will save you time and money.
Work with a Realtor
Work with a reputable Realtor to help you find the perfect home, condo or apartment that meets your needs and budget. The National Association of Realtors is the largest professional association in America, with over 1.2 million members. What we do is provide support, training and a code of ethics that our Realtors subscribe to. We also provide a vast amount of information to consumers through our Web sites,” explains Tom Stevens, a former president of the National Association of Realtors (www.realtor.com).
“In addition to making sure your Realtor knows the area where you want to move, I suggest asking about their experience and how long they’ve been working in real estate,” he says. “Determine if the agent knows and understands the current real estate market, and is willing to take the time necessary to truly understand your own unique wants and needs. The Realtor you hire will be able to help you find the perfect home, based on your needs and finances. Also, make sure the Realtor you work with represents you, not the seller.”
Choose the Right Location
Choose a geographic area that’s ideal for your needs, lifestyle, and taste. Once you tell your Realtor what you’re looking for, it could take anywhere from a few days to 30-days or longer to find you the perfect home. “It’s average for someone to look at between 15 and 25 properties before making an offer on one,” says Stevens.
Find a Mortgage Broker
Find a mortgage broker who will help get you approved for a loan with the best rates and lowest fees possible. Be prepared to shop around for the best home financing deals. A lot of this research can be done online, using websites like www.Bankrate.com. You should also contact several local mortgage brokers, banks, credit unions and mortgage lenders to compare rates and fees. Consider getting pre-qualified for a mortgage, before you start shopping. This will help you pinpoint your home buying budget, so you don’t begin shopping for homes you can’t ultimately afford.
Consider the Home You Want
Once you know where you want to live and how much you can spend, plus what type of home you’re looking for, a Realtor will be able to assist you better in finding your dream home. Determine exactly what you’re looking for in a home, in terms of its style, size, living space, design and location. How many bedrooms and bathrooms would meet your needs? Would you prefer a stand-alone house, a condo or an apartment? Is the quality of the local schools important to you and your kids? Are you planning to expand the family in the near future? If so, does the home offer ample space? If you’re moving into a condo complex or gated community, are you willing to adhere to the rules and regulations of the homeowner’s association, plus pay the required monthly fees?
Consider Getting Pre-Qualified
Participating in a pre-qualification process with a mortgage broker will give you leverage when negotiating with a seller. Plus, it will make the actual mortgage application and approval process easier, because you’ll already have completed much of the initial paperwork. “I recommend getting pre-qualified as a first step because this will make you a more attractive buyer to Realtors and sellers. Once you go through the pre-qualification process and then start looking for a home to purchase, you should begin the pre-approval or full mortgage application process,” says Mark Giordani, who served as a senior mortgage consultant for several years at one of the largest privately owned mortgage brokerage firms in the United States, before deciding to pursue other professional interests.
Shop for a Mortgage
As you shop for a mortgage, you’ll quickly discover there are hundreds of different mortgage products available to qualified borrowers. Your options go way beyond choosing a fixed rate mortgage with a 15-, 20- or 30-year term and a fixed APR. These days, potential homeowners can opt for a fixed-rate mortgage, adjustable rate mortgage, interest-only mortgage, a mortgage that starts with a fixed rate and then converts to an adjustable rate after a pre-defined time period, a balloon mortgage, or some type of hybrid mortgage.
FHA Loans and VA Loans are also viable options for some buyers. Different lenders offer vastly different types of mortgages, each of which has their own unique approval guidelines. Your mortgage broker should have knowledge about a wide range of mortgage products, have a good relationship working with multiple lenders, and have the experience necessary to analyze your needs in order to match you up with the ideal mortgage product that you can qualify for.
“There are many things that distinguish one mortgage brokerage firm from another. The first is size. Most often, the larger mortgage brokerage firms do more volume of business with the banks and lenders they represent. This often means that they have lower rates that can be passed on to you,” says Giordani. It’s your responsibility, however, to carefully analyze each financing deal and shop for the very best rates and lowest fees you qualify for. Just because you qualify for a low-interest rate, for example, your broker may not offer it to you. After all, the higher your rate and the more fees you pay, the more profit a broker earns. Thus, regardless of how much you like and trust your broker, it’s essential that you do your own research and compare offers from multiple brokers and lenders.
Mortgage rates are constantly changing — often multiple times in a week. Thus, once you’re ready to move forward and make an offer on a home, you’ll want to lock in a specific mortgage rate with your broker. If rates then go down, you’ll probably receive that lower rate. If, however, interest rates rise, you’ll still receive the rate you locked in, as long as you complete the borrowing process (your closing) within a pre-determined time frame.
Buying a home can be a time-consuming and complicated process, especially if you need to shop around for mortgage financing, plus handle all of the details related to finding the perfect home yourself. By surrounding yourself with a qualified and experienced Realtor, mortgage broker, accountant and real estate attorney, for example, this process becomes somewhat easier and will reduce the risk associated with making bad financial decisions.
According to Giordani, how long the mortgage approval process takes will vary based on your situation and the type of mortgage product you’re applying for. “A lot also has to do with how quickly the borrower provides the necessary documentation needed to get their application approved,” he says. “During the process, if you’re asked for specific types of financial documentation, this is a standard procedure. You are not being singled out. Different lenders required different documentation, based on the type of mortgage being applied for. The lender will often request additional documentation throughout the application and approval process.”
“One common problem borrowers face is that a broker will state that they qualify for a mortgage at a very desirable rate without obtaining any pre-qualification information and reviewing their actual financial documentation first. A broker will need details about your credit, finances, and employment before being able to provide even a ballpark figure as to what you qualify for,” adds Giordani.
Regardless of what advice you’re given, make sure the home you select is one that you really love and can afford. Compromising on the home or taking on debt you can’t handle will only lead to problems and disappointment down the road. Acquiring a new home and taking on the responsibilities of homeownership results in significant life changes — usually for the better. As someone who is looking to rebuild their life after a divorce, make sure becoming a homeowner is a set of financial and emotional responsibilities you’re willing and able to take on.