Should You Buy a Home During a Divorce?
While we wish there was a simple answer to this question, the honest truth is that it’s going to depend on your individual situation. Depending on where you live, any property purchased while you’re still married may become community property. This can mean that your spouse has automatic interest, or ownership, in the property, even if they’re not buying or even living in it themselves. This is the case in California, for example. Michael Bender, partner at the Grey Legal Group in California, told The Balance in a video call that nearly all property or debt acquired by either half of the couple is considered community property, and both parties will have an interest. There are some exceptions to this, such as gifts and inheritances, but even these situations may result in the asset being declared community property if your finances get mingled. If you have a good relationship with your ex, you may be able to make special arrangements to release their interest, such as a quitclaim deed or an interspousal transfer deed. You’ll also want to consider your financial situation post-divorce. Are you moving, changing jobs, paying alimony, or making child support payments? If your debt-to-income ratio (DTI) will be changing, carefully consider whether purchasing a home makes good financial sense.
Buying a Home During a Divorce
Community Property
Some states treat property that you purchase while married as community property. This means that if your real estate purchase closes while you’re still married, it’s possible that it automatically becomes community property and your ex-partner will have part ownership of it. Only nine U.S. states have community property laws, but you’ll want to check to see if this applies to you if you’re interested in buying a home during your divorce.
Separating Finances
Did the two of you choose to combine finances? Whether it’s just a joint bank account or a whole myriad of financial commitments, separate your finances as much as possible before investing in a home. There are a few reasons for this. First, when applying for a loan, banks will look at how much debt you have. Let’s say that you and your ex purchased a car two years before your divorce. You’re both on the loan, but it’s your former spouse’s car. It doesn’t matter that they’re making the payments; the bank is going to consider that debt when calculating your DTI. Separating your finances will give you a clearer idea of how much you can afford post-divorce and can also free up some of your income for the mortgage. Second, some states—like California—consider most income earned while you’re married to be community income. Using community income to purchase a separate property may muddy the waters when it comes time to complete the divorce. “Until you have a judgment issued where you actually break up the accounts that you have, don’t do this,” said Bender.
Quitclaim and Interspousal Transfer Deeds
If you’re in a state with community property, it’s possible to have your soon-to-be-ex-spouse complete specific forms releasing their interest in your home. There are two ways to do this. A quitclaim deed transfers the title of a property from one person to another. If your spouse is also on the title of your property, they can sign a quitclaim deed to release their interest to you. An interspousal transfer deed does effectively the same thing; by signing this form, your spouse is choosing to transfer their interest in the property solely to you. This can convert community property to separate property or vice versa.
Affording a Home Purchase During Divorce
Debt-to-Income Ratio
It’s important to consider how your income will be changing after your divorce is final. There are a number of factors that can affect this. Will you be changing jobs? Moving to another state? Working reduced hours? Will you be receiving alimony or child support payments? All of these situations will affect your income and how much of a mortgage payment you can afford. In general, lenders will approve borrowers with DTI ratios under 36% (and up to 45% depending on other factors like your credit score) for a conventional mortgage.
Credit Score
Although your credit score won’t necessarily drop because of a divorce, it’s possible that it can be affected as your financial situation changes. This is especially true if the divorce means you end up missing payments or taking on new debt. A better credit score leads to better loan terms, so if purchasing a property is your goal, you’ll want to protect your credit score as much as possible.
Down Payment
If your loan requires a down payment, consider how you came by that money. Is it community income? That can complicate matters when it comes to processing the divorce. Otherwise, saving up money during a divorce can be difficult, especially if it ends up involving lawyers, which can cost thousands of dollars.
