Divorce isn’t just about emotionally and physically splitting up with your partner; you also need to separate from them financially too. While it’s tempting to rush into buying a property and starting a new chapter of your life, there are things that you need to be aware of if you plan to take out a mortgage following a separation.
Banks and building societies don’t differentiate between the end of marriages and civil partnership and both are treated the same way for the purposes of mortgage lending. We spoke to four mortgage experts to get their advice on how those getting a divorce should proceed when getting a mortgage.
You can start the process of applying for a mortgage at any point in your divorce proceedings, but lenders will need to have the finalised details of your post-divorce financial settlement before they can approve an offer.
“It’s worth asking your mortgage broker to check with specific lenders, as their appetite varies,” says Liz Hunter, commercial director at Money Expert.
“The key point is that you need to demonstrate you’re no longer legally married or in a civil partnership, and that any shared assets from the marriage have been properly divided.
“Don’t apply before you have those documents in place; you’re unlikely to get anywhere and you risk triggering a hard credit search that won’t lead anywhere.”
Lenders will look at your “new normal, solo economy” accounts to work out your borrowing capacity and this is often not made clear until details such as the property equity split and any maintenance payments are agreed by all parties.
That said, it’s worth consulting a mortgage broker early on in the process. “They can advise you on the financial settlement and help you structure things in a way that’s most mortgage friendly.
“It doesn’t cost you anything, and it can save your settlement negotiations from taking a turn that damages your borrowing capacity,” says Hunter.
In addition to the three-to-six-months of bank statements that everyone applying for a mortgage is asked for, those getting divorced will also need evidence of their split and the agreed financial settlement.
They will need to show lenders their decree nisi or decree absolute and the consent order approved by the court, confirming who owns what and when, and the financial agreement, including maintenance payments or spousal support. If the divorce hasn’t been finalised and the latter isn’t available, a solicitor-drafted separation agreement may by sufficient for some lenders.
“Save emails, consent orders, bank statements showing maintenance, decree documents, everything. When lenders ask for evidence, they want it quickly and in original form, not reconstructed months later,” advises Hunter.
One aspect of a divorce that many couples don’t realise is that you remain legally liable for the mortgage on your existing home, even if you’re not living there.
Lenders will view this as a liability until the property is sold or your name is removed from the mortgage. This can delay the process of obtaining a new mortgage and potentially buying a home.
“Once the property is sold, the existing mortgage must be cleared, and net proceeds are then divided in line with what’s agreed or ordered,” says Brendan Crowshaw, head of mortgage and savings distribution at Vernon Building Society.
If your home is “under sold” but hasn’t completed, you need to choose your lender carefully. “If you’re in the middle of selling the property and the proceeds haven’t cleared yet, most lenders will factor in the expected equity from the sale as part of your deposit,” says Hunter.
“However, and this is important – some lenders get nervous about the timing. They want to see either the completion statement in hand, or, at the very least, a legally binding exchange of contracts.”
For this reason, many divorcing couples rent and wait for their previous home to sell before getting a mortgage and buying again. While this may feel like an unnecessary and expensive delay, in the long run, you are likely to be able to secure better mortgage rates and being chain-free will help when negotiating the price of your new home.
“It is sometimes worth renting for 6-to-12 months post-separation to understand your new financial baseline before committing to a new mortgage,” adds John Fraser-Tucker, head of mortgages at Mojo Mortgages.
How do lenders view maintenance payments?
Along with your income, lenders need to factor any maintenance payments into their underwriting.
“Many lenders will accept child maintenance or spousal support as income to bolster affordability, provided it is regular and well-evidenced (often needing a minimum of 3–24 months of payment history),” says Fraser-Tucker. “Conversely, if you are the one paying maintenance, these figures will be factored into your debt-to-income ratio, potentially reducing the amount you can borrow.”
While lenders will typically use 4-5 times your own income, “they may only use a percentage (e.g., 50–60%) of maintenance income rather than the full amount,” says Fraser-Tucker.
Banks and building societies don’t differentiate between the end of marriages and civil partnership and both are treated the same way for the purposes of mortgage lending. ·Olga Pankova via Getty Images
What’s important to note is that lenders don’t view maintenance payments with the same perspective.
“What can be included as far as maintenance payments are concerned differs from lender to lender. It may include spousal maintenance (how long the agreement is for could impact the term of the mortgage or it may be court ordered) or child maintenance,” says Mark Harris, chief executive of SPF Private Clients.
“Some lenders aren’t comfortable if this is the only income and, if it is, depending on the amount, it will still be defined by the lender’s affordability assessment and loan-to-income rules.”
Many of the larger lenders use automated criteria when underwriting for mortgages and this is often disadvantageous to the complicated financial landscape of those in the middle of a divorce.
“Some [smaller] lenders and building societies use manual underwriting, so they may be more willing to consider nuanced or complex income situations,” says Crowshaw.
At the same time as disentangling your financial affairs, you need to disentangle your credit ratings and histories too. Just because you’ve officially divorced, doesn’t mean your credit ratings aren’t still linked. Disentangling yourself is particularly important if your ex-partner has a poor credit rating and could damage your prospects of getting a mortgage, loan or credit card.
“You need to actively request a “disassociation” from the credit reference agencies (Equifax and Experian). You can do this online, and it’s free,” says Hunter. “Send a disassociation notice to both, don’t just contact one and assume the other will know. It usually takes a few weeks for the link to drop off their systems. Once it’s done, check your credit reports again to confirm they’re clean.”
You also need to ensure that all joint accounts, mortgages and credit cards are closed down. “Until the joint mortgage is settled, the financial link remains active, and your ex-partner’s credit behaviour can still affect yours,” says Crowshaw.
While it’s tempting to rush into this new part of your life, it’s important to take your time and make sure you do things properly. In the long run, you and your finances will benefit.
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