Qualifying for a Home Loan After Divorce 

The divorce process is a taxing one for most couples. Getting through the divorce can feel like a marathon, with the finish line as the light at the end of the tunnel. What most couples don’t think about are the ramifications to their lives after the courts finalize the dissolution of marriage. Divorce does not erase the marriage from history. Depending on the terms of the settlement, you may have to deal with aspects of the divorce long after the court process ends. One such issue may be qualifying for a home loan.

Address Home-Buying Issues During Settlement/Trial

It’s crucial to think about home loans prior to the finalization of your divorce – during the settlement or trial proceedings. This is when you have the opportunity to sell out of your interest in a shared residence. Otherwise, you could find that you’re still liable for old home loans after a divorce. In many divorce cases involving a shared home, one party buys out the other party and remains in the residence. The party who continues living in the home is typically the one with primary custody of the children.

In these types of settlements, the official agreements will generally have a provision that awards the home to one party. This includes ownership of any of the home’s encumbrances, including loans, with a “hold harmless” clause. This type of agreement means that one party agrees not to hold the other liable for any losses, damages, or legal matters. This clause is meaningless to creditors in charge of the loan. The creditor still has the power to seek payment through the either party. Thus, a typical settlement may not remove liability of the loan from your shoulders.

As long as you’re still accountable for the home loan, you likely will not qualify for a new home loan (depending on your finances). It does not matter whether a hold harmless clause is in effect. The only way to remove yourself from the loan is to have your spouse refinance it in his/her name, or to sell the residence. You can also make sure your divorce judgment has a provision that regards the transfer of the home’s title and deadline for your spouse to refinance.

Other Situations That May Affect Future Home Loans

Being responsible for your old home loan isn’t the only issue that could prevent you from securing new loans. You might also have trouble proving your income level with alimony or child support payments. You could potentially use payments your spouse makes to you as part of your income to qualify for a new loan or mortgage, but only if you spell out this stipulation in a divorce decree. You must show the lender proof that you’ve received this type of income for at least six months prior and that you will continue to receive it for at least the next three years.

Joint financial obligations, such as shared debts or vehicle loans, may also make it difficult to get a new loan or mortgage. To avoid this, your decree must state that your ex-spouse is responsible for paying these obligations. You must also show at least one year of pay stubs showing that your spouse, and not you, makes these payments. Otherwise, your loan application must include these liabilities. Once the courts finalize your divorce paperwork, it’s much more difficult to sort out issues regarding home ownership and new loans. Work with an attorney throughout the divorce process to protect yourself once you’re newly single.