New Q&A: The Ex-Files, advice from a family and divorce lawyer. 
Buying a home can be a challenging endeavor for anyone, especially with today’s high prices, lack of inventory, and elevated interest rates. On top of the usual homebuying challenges, newly divorced individuals often face additional obstacles that can make homeownership seem out of reach. However, with the right approach and a bit of planning, owning a home can still be an attainable goal for those who have recently split from their spouse. We spoke with Aradhana Aggarwal, a CPA based in Durham, North Carolina, about the realities of buying a home after a divorce and the strategies you can use to best position yourself for getting a mortgage.
Can divorce impact a person’s credit score and ability to purchase a home?
Divorce can definitely affect the credit and financial health of both parties – and in 99% of cases, they’re not going to be better off than they were before the divorce. They might have to pay divorce fees, they might have to pay the other party, and their credit and finances often drop as a result. If that happens, it can be very hard to buy a house, especially with the current market, inventory, and interest rates. Sometimes people need to wait a while to buy, and they might have to rent in the meantime. Renting can be a good option because even though the monthly rent might be close to what the mortgage payment would be, renters don’t have to worry about repair costs, real estate taxes, etc. It also gives them flexibility; if they need to move to a different town or state for any reason, they can do so with less hassle.
People can also reach out to the Federal Housing Administration website to pursue a home purchase; their loans are more accessible, and the down payments and interest rates are typically a bit lower.
What mistakes should divorcees avoid when buying a house?
I see a lot of people who don’t change their spending habits after a divorce, even if their financial situation has worsened. They struggle to downsize because they’re used to a certain lifestyle. I think it’s really important for people to get some financial coaching so their spending can be monitored. If they can’t buy a house right away, they can create a plan to save for a down payment so they can purchase in the future.
What documentation is needed to prove financial stability to lenders?
That’s a very good question because here’s something I see pretty often: People get divorced and take on side jobs to help pay the bills. Then they think that because they’re making good money, they can get a mortgage. But even if they make significant income by doing side hustles, a lender is going to want to see a history of steady income. So it’s not just a matter of getting a mortgage because you happen to be making good money at the moment. The lender will want to see two years of tax returns for a 1099 worker, along with bank statements, to substantiate their earnings. If a person is in a salaried position, they will also have to provide two years of W2s and tax returns.
What if someone has little or no credit?
I see this all the time. For example, I had a client who was a stay-at-home mom for 22 years and she really didn’t know anything about finances. When it was time for a divorce, she started learning new skills. She went to school and got her MBA, she took a finance course, and now she’s doing great. So learning new skills that can pay off in the long-term is highly beneficial, and a great way to become financially independent and gain an understanding of your financial situation.
In my experience, women are more likely to leave a marriage and not understand finances very well because their husband always took care of those things. This can leave them feeling very helpless and overwhelmed. A financial counselor can be really helpful in these situations because they can outline what a person’s financial priorities are and help ensure those priorities are met.
Some divorced people don’t even know what their tax returns look like. They may have filed jointly with their ex-spouse, but they were never actually part of the process and they have no access to their returns. It’s important that they educate themselves and gain access to their financial information. They can always go to irs.gov and access the information there.
How does someone start budgeting to buy a home?
I suggest that people create a spreadsheet that shows their monthly income and their budget, so they have a visual of what money is coming in and going out. They should monitor each and every expense so they can see where their money goes and where they can cut back.
It’s also worth noting that people tend to get into trouble with credit cards because you don’t have to pay on them right away. Because of this, people tend to spend and spend on them, and they just get more and more in debt. I suggest people use debit cards instead of credit cards, that way they can’t spend more money than they have in the bank.
