Attaining Financial Independence After a Divorce (Part 2)

June 3, 2020

In part 2 of "Attaining Financial Independence," we cover "All Things Credit" including:

  • Importance of building credit and maintaining good credit
  • Rules and processes for securing a mortgage or refinancing an existing mortgage
  • What you need to know about debit and credit cards

Let's discuss the scenario where one party wants to remain in the home, but they are the spouse who earns less.

Can the spouse staying in the home refinance? Should they assume the mortgage?

According to Michelle Oddo of Oddo Group, a lending expert with 25 years experience, get advice from a lender as soon possible. The quicker you sort out housing, the easier it will be to address other divorce issues. It's hard to worry about anything else if you don't know where you, or your children, will sleep.

A lending professional determines if the spouse who wants to stay in the marital home has enough income or expected child and spousal support to sustain the mortgage. For conventional loans, a spouse would need to prove six months of income or support to be refinanced. If it is a FHA or VA mortgage loan, the spouse will only need to show three months of expected support payments to continue for three years.

If the spouse does not have the income or support payments, and it's a conventional loan, Oddo recommends refinancing since mortgage rates are still low and conventional loans are not assumable.

What about a spouse with less than stellar credit? What can they do to quickly play catch-up?

Michelle Oddo recommends a secured credit card. Even one with a low limit of $300, used to pay recurring charges can quickly help either build or repair credit.

What about a low FICO score or a blemished credit report? How can one party rehab these?

Ms. Oddo warns spouses in this situation to be wary of paying off the balances and closing the cards. As soon as they are closed, you lose that credit history. If you end up wanting to secure another loan post divorce, it is better to have a credit history rather than none at all.

When a client's credit situation is overly complicated and beyond the advice of a lending professional, the Oddo group can refer you to a trusted credit repair company that has assisted their clients.

What about when one spouse has student loan debt? How does that affect their debt to income ratio?

Ms. Oddo: It all depends on the kind of payment plan they have selected and whether Freddie Mac or Fannie Mae loans are involved. Typical payment plans are income based and conventional student loans. Those with an income based payment have a higher debt to income ratio since it takes them longer to pay down the principal on the loan. If a party is in deferment on their student loans, i.e. not making any payments at all, their debt to income ratio is likely too high to support a creditor letting them open up a line of credit in their name and they would need a co-signer.

What about credit and debit cards?

Credit and debit cards are used in nearly identical ways. However, there are some significant differences you need to understand.

When you spend with a credit card, you are spending borrowed money!  Sometimes people use credit cards for monthly purchases or to take advantage of points or rewards. Be sure to pay credit cards off in full each month so that fees aren’t incurred.  Don't leave small balances on credit cards that build up over time and carry interest charges. 

Debit cards are tied directly to your checking account.  If you don’t have the funds to cover the deduction and don’t have overdraft protection, the charge is declined and you are charged a hefty fee.  With overdraft protection, the bank honors the deduction and you pay interest to the bank.

One of the most significant differences between the two is the liability limit for fraudulent transactions. Under the Fair Credit Billing Act, with a credit card, you have no or minimal liability for unauthorized charges, and have recourse if what you purchased was damaged or not delivered.

With a debit card, however, your liability depends largely when you report the unauthorized charges to your bank.  The worst case scenario is if you do not discover the fraudulent charges for more than 60 days after receiving the statement showing the activity, you could be held responsible for all charges after the 60 days.  Even IF you do alert the bank within the 60 day period, you could still be responsible for up to $500. This is why it's important to periodically check your credit card charges online even before the statement is issued online or sent snail mail.

Speak with the financial professionals at DRCC

The Certified Divorce Financial Analysts at the Divorce Resource Centre of Colorado are trained to recognize and help divorcing spouses prepare for the financial realities of divorce and plan their futures. It only takes a 20 minute exploratory call to find out more.

For Important Divorce Documents, Complete the Form Below!

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Forms include: Asset Worksheet, Household Goods Inventory, Financial Checkup, Priorities Worksheet and Mandatory Financial Disclosures.

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