Credit is really important. Not only does it impact one’s ability to obtain a new loan or credit card, it may also impact the ability to get a job or run a small business, to participate in a government program, or to obtain insurance.
Divorce can wreak havoc on your client’s credit if he/she isn’t careful. Divorce is a financial challenge to most, which makes monitoring one’s credit even more important.
I recommend that your clients request a credit report at the beginning of the divorce process and also request a report from one of the three agencies every 3-4 months to continuously monitor changes during the process. (Everyone is entitled to get one free credit report from each of the three credit reporting agencies each year. Credit reports are available at www.annualcreditreport.com. These reports will include credit history only, not a score.)
Make sure that your client has some credit accounts in their own name. It’s best to do this throughout life; if one is getting a divorce, do it as soon as possible to help establish a personal credit history separate from the soon-to-be ex-spouse.
There are several credit bureaus – Experian, Transunion, and Equifax are the major players – and each has their own version of a credit score, each weighing different factors in debt payment history a little differently. But FICO scores are the most important score of all – these are scores used by lenders (particularly mortgage lenders) to determine credit worthiness. A FICO score may often be 10-40 points different than a proprietary score from one of the credit bureaus. If your client wants to obtain their FICO score, usually they will have to pay one of the credit bureaus a small fee to obtain a credit report that includes a score.
Having good credit pays off! For a person or couple with a score less than 600, it’s highly unlikely a home purchase is possible, however all borrowers are encouraged to apply. At 600-640, it’s possible, but the interest rate will be higher and loan options limited. With scores in the 640-740, better rates and more options will most likely be available. With scores over 740, a borrower is generally eligible for the most loan options and best rates, which can mean a more expensive house is affordable or paying less each month (and over the life of the loan) than someone else with the same loan amount but lower score.
If your client’s credit score is lower than they’d like or they see inaccuracies on the report, I recommend meeting with a credit consultant. Be wary of credit counseling services with a monthly fee; some of these services are great, but some are not.
(You can read more credit tips here: http://www.rebeccashomeloans.com/credit-is-critical/)
During the divorce process, at some point it will make sense to begin closing any joint credit accounts. Be sure that you have set up your own individual accounts prior to this happening. And don’t forget the home equity line of credit! If your client and soon-to-be ex have a HELOC (home equity line of credit) on their existing property and it is in the names of both spouses, close it. This means sending a request to the lender.
- Having a zero balance does not mean that the account has been closed; you must specifically request that the HELOC be closed
- Leaving the HELOC open presents an opportunity for one of the spouses to use it, creating a new liability for both spouses
If your client is divorcing and has an existing mortgage or wants to buy a new home, refer them to a mortgage lender – preferably a Certified Divorce Lending Professional® – early in the divorce process.
A Certified Divorce Lending Professional® (or CDLP) has special training and expertise to navigate the complicated intersection of mortgage lending, real property laws and tax codes. CDLPs work with attorneys or financial advisors and their clients to:
- Identify the options for and implications of dividing residential real estate
- Identify divorce settlement agreement elements necessary to support future residential real estate financing needs
- Manage post settlement residential property transactions
A CDLP can help the divorcing and their attorney or financial advisor make decisions about existing residential real estate and prepare for future residential real estate financing needs. Your client’s goals for future home ownership are critical to understand early in the divorce process so you can help craft a settlement that supports those goals. However, attorneys and financial advisors are not experts at mortgage financing, the same way loan officers are aren’t experts on the law or financial planning, and a CDLP can step in to provide that expertise and detailed recommendations specific to a mortgage situation and goals.
Start smart! Engage a Certified Divorce Lending Professional as part of the team to help you and your client understand their options, make decisions, and be prepared for a new financial future.
All loans subject to credit approval. Rates and fees subject to change. Mortgage financing provided by PrimeLending, a PlainsCapital Company. Equal Housing Lender. © 2016 PrimeLending, a PlainsCapital Company. PrimeLending, a PlainsCapital Company (NMLS: 13649) is a wholly owned subsidiary of a state-chartered bank and is an exempt lender in TX. V010116.