In a recent post, I sat down with Amy Hoch Hogenson, an attorney with the law firm of Paule, Camazine & Blumenthal, P.C., in St. Louis, Missouri, to get her perspective on the effect of divorce on individual credit ratings.
One of the challenges faced by couples that are divorcing is deciding which one of them, if either, should maintain ownership of the marital home.
Amy concentrates her practice on complicated divorce cases, so she is frequently at the center of this decision. In my credit restoration business, I see the financial struggles that frequently arise out of that decision.
Question: Amy, oftentimes, people who are divorcing are faced with dividing one of the biggest marital assets, the house that was purchased during the marriage. In your practice, what are the issues you see that people should consider in making this decision?
Amy Hoch Hogenson: The very first consideration should be, can you afford to keep the house? In many instances the mortgage and associated homeownership expenses are being funded by two salaries. You want to make certain your single salary is going to be enough to pay the bills associated with ownership of that home.
First, examine your cash flow. How much does it cost to keep the home? Collectively, what do the monthly mortgage payment, insurance, and taxes cost?
Give some thought to what other monthly costs come with the operation of the home, such as utilities and maintenance of the home’s interior and exterior. Calculate a realistic estimate of what you pay for things like lawn care and landscaping. Even if you don’t hire someone to do that work, there are costs associated with maintaining a lawn mower and purchasing perennials for the flower beds. Don’t forget the costs for they handyman, the plumber, the carpet cleaning, window washing, and other expenses that go along with home ownership.
Grab a calculator and determine the average cost of those expenses monthly. (You may want to add a little extra as well, for expenses like the water heater that may reach the end of the line.)
Finally, compare that cost against your total income from all sources, including maintenance or alimony, child support, employment income, or any other income from investments or trusts including interest income or dividend income.
Question: Is there a need to transfer legal ownership of the house? If so, how is that accomplished?
Amy Hoch Hogenson: If the mortgage is in joint names there will be a need to remove the other spouse’s name from the mortgage and deed. To remove your spouse’s name from the mortgage, it will be necessary to refinance the mortgage loan or, alternatively, for the member of the couple who is taking ownership to assume sole responsibility for the loan. This second option is rarely available. In order to remove your spouse from the deed, they will need to sign a deed, generally a quit claim deed (often signed at the time of refinancing of the loan), removing their name from the title.
You will need to explore the best refinancing options, then apply for and obtain financing from a lender. Oftentimes the spouse who is keeping ownership needs some time, post-divorce, to obtain financing.
For my clients in this position, I recommend the divorce agreement allow up to twelve months, post-dissolution, to obtain refinancing. This amount of time is often necessary for building or in some instances rebuilding credit. This time period also allows the client to have a lengthier history of earning income from all sources including maintenance and child support. Most mortgage bankers and lenders require a showing of these types of income for approximately six months prior to approving financing. I encourage my clients to reach out to a good mortgage bank to discuss their options and timing.
That’s correct. Credit becomes especially important post-divorce. Even if the marital home is sold and the equity in it is divided between the couple, mortgage financing is likely going to be needed for each of the two new homes that are purchased.
No matter what decision is made regarding ownership of the marital home, it is important that both members of the couple deal “head on” with any credit related issues. As early as possible in the course of the divorce proceedings, the parties should explore whether there any existing credit problems.
Those problems might include significant debt compared to assets, or take the form of a poor or even nonexistent credit score.
Often, the significant debt I just referenced is in the form of credit card debt. This can lead to a “triple whammy” when it comes to obtaining mortgage financing:
1. Servicing this credit card debt leads to less available monthly cash flow. Available funds have to be dedicated to paying at least the monthly minimums on this debt. The concern, however, is that just paying the minimums can drastically inflate the interest paid on the account over time. It is generally in any person’s best interest to pay more than the minimum. This credit card debt can also make it more difficult to save towards a down payment for a mortgage.
2. The accumulated debt, in and of itself, could be cause for the mortgage lender to deny your loan. Mortgage lenders have strict requirements about debt to income ratios. If your ratio is too high, you could be denied a loan.
3. Credit card debt, more specifically credit card “utilization,” is a major factor in determining your credit score. As you and I have frequently discussed, utilization is simply a fraction. The amount of debt that you have on credit cards is the numerator of the fraction; the credit card limit is the denominator of the fraction. If your credit utilization exceeds thirty percent of the available limit, it is damaging to your credit score. The higher the percentage of utilization, the more damage to your score.
Question: Those are all great points!
Amy Hoch Hogenson: Thanks. It can often be in the interest of someone going through a divorce to talk to a Credit Repair Company to identify if they have issues with their credit, as well as to find options available to them to address those issues.
A reputable credit expert can review your situation and help you to determine what can be paid off and what can be negotiated down to reduce your debt to income ratio and your credit utilization. Over time, even during the pendency of your divorce, you can improve your credit rating. This improved credit rating can help you not only keep the home for you and your children, but can lead to better interest rates, and more savings from a monthly cash flow perspective.
Question: Amy, thanks once again for sharing your expertise with our readers. The advice you have given here is invaluable. Unfortunately, we frequently work with clients who didn’t have the benefit of your knowledge and whose credit and financial health have suffered serious damage as a result. We are hopeful that people take advantage of the opportunities that you have suggested here. Doing so is likely to result in significant savings for them.
Amy’s practice is limited to Missouri and the comments are specific to Missouri only. If you are going through a divorce or contemplating filing for divorce, make certain that you discuss these issues with your attorney. Diligence on your part, as well as on the part of your attorney can help you to avoid serious damage to your credit score.
THE CHOICE OF A LAWYER IS AN IMPORTANT ONE AND ONE THAT SHOULD NOT BE BASED SOLELY ON ADVERTISING.