June 1, 2016
In most of our divorce cases the assets include real estate. One of the first questions you may want to ask your divorce client is, “What’s your credit score?”
When there is real estate, whether it is a marital home, vacation home or rental unit, we usually see one of several outcomes:
Whatever the agreement is, it is likely that at least one of the parties will be applying for a new mortgage. Their credit score will be an important component of the underwriting process and can affect not only the ability to borrow money, but also the interest rate. If you want to be sure your client will be able to follow through on the real estate plan that is part of their divorce decree then the first step is to have the client pull their credit score.
Mortgage underwriters look at 3 components of the borrower’s finances: their credit score, their debt-to-income ratio and the equity-down payment ratio. Generally if the credit score is 620 or better the person is likely to get a mortgage. Having a credit score below 620 means the lender may have limited options to offer.
The credit score not only affects the ability to obtain a mortgage, but also the mortgage terms including the interest rate. The higher the score, the better the terms. This is important for a client who has limited income to spend on a mortgage payment.
Having a low credit score is not ideal, but there are steps you can take to improve it. Many lenders work with credit repair agencies to help their clients repair bad credit. This can take 6 months or more. Look for a lender who has a relationship with a good agency – there are plenty of bad agencies out there. The lender, agency and client will work together to remove any incorrect information from the credit report and improve payment history, debt ratios and other factors that affect the score. Because this process takes time it’s important to know what the credit score is early in the divorce process so work can begin immediately.
Beginning later this year monthly utility bills, including cell phone bills, will be added to the credit score. It is very important that your client knows he or she should make all payments on time throughout the divorce process, even if they are in disagreement with their soon-to-be ex-spouse about the nature of the bill.
A credit report is available from any of the 3 credit reporting bureau’s and can be purchased at www.myfico.com.
No attorney enjoys having a client return months or years down the road because a component of the divorce decree cannot be carried out. Use your client’s credit score to help create a plan that you are confident can be followed through.