There are many factors to consider when putting together a financial settlement agreement, but one of the things that has come up recently among my clients has been refinancing your house as part of your divorce financial settlement.
There are two main things to consider when agreeing to anything, but especially when agreeing to a financial settlement that has serious consequences if you can no longer uphold your end of the deal.
Consideration 1: Is it Feasible?
First things first… You have to make sure it’s actually realistic and that you A) can refinance on your own and B) can do so within the terms of the agreement.
Some of the language I’ve seen lately has been around the time limit for refinancing. In some cases, there are some pretty serious consequences if you aren’t able to — in some cases, I’m seeing as little as 30 days for refinancing. So, make sure that what you agree to is realistic and you’re not setting yourself up for a problem.
Related Reading: Financial Settlement Analysis
How do I know if I can even refinance my home during my financial settlement?
Talk to a lender! Find out how long it takes to refinance and if you are even in a financial position to be able to refinance. Will they approve your loan, and what do you need to do to ensure you get approval for your loan when you refinance your home?
Of course, proving income is one thing everyone needs to do when they refinance their home, but especially if you’re going through a divorce and your income level is changing. Sometimes, you receive spousal or child support as part of your settlement. You may need to show the bank several payments to prove you have that income for the purpose of refinancing.
However, in some cases, you may not have enough income or have the credit history on your own to refinance. Should that happen, you may need to find a cosigner so you can stay in your home.
Related Reading: How to Keep your House in a Divorce
Brush up on your credit history!
You may discover when you speak to a lender that your credit score is not what you thought it was (and/or that number isn’t high enough to approve you for refinancing). If that’s the case, work on cleaning up your credit. (I have a great post on understanding your credit score here and a bunch of posts about debt and credit in general here.)
Maybe you’ve been late on payments or you have things that are totally inaccurate on your credit report. But you won’t know that if you don’t do the work to discover it in the first place! Look up your credit history so you know that information beforehand and take steps to clean it up if necessary.
Arm Yourself With Information
I can’t emphasize this enough: You need to know what it will actually take to get that refinancing approval done!
The reality is, the best thing you can do is arm yourself with information. Talk to a lender ahead of time so you know that whatever terms you’re agreeing to in your financial settlement are realistic for you (and be aware of the consequences if you’re not able to follow through on those agreements).
Related Reading: Why You Need to Work with a Divorce Financial Advisor
Thing 2: Does it Make Sense for the Next Phase of Your Life?
You talked to a lender and have approval (or know what it’ll take to get approval) to refinance your home as part of your divorce settlement — but is it the best decision for you in the next phase of your life?
When I look at agreements, I’m not looking at them with a legal mind. I’m not a lawyer! But I am looking at things from a financial perspective. I’m doing a reality check that if you stay in the home, you’re able to afford it from a cash flow standpoint.
It’s very likely that your finances will change after your divorce. Instead of having two incomes or one income at a certain level, you’re now having to pay all the bills and expenses with one income that may be lower than you were used to. You must consider if it’s feasible for your financial reality or if it will be a major financial burden (high fees, utilities, etc) that doesn’t make sense to carry.
It doesn’t always feel good, but having a clear picture of the money coming in and the expenses going out is necessary to determine if it makes sense for you to refinance your home. The worst thing is to take on a financial commitment that would set you up for stress...or worse.
Related Reading: 7 Steps to Determine if You Should Keep the House in Your Divorce
At the end of the day…
When you’re refinancing your home as part of your financial settlement, ask yourself if it’s realistic and if it makes sense for the next phase of your life.
Consider if you have…
- The income to support it,
- The credit score to support it, and
- The long-term cash flow to maintain that home.
At the end of the day, it’s so much better to be proactive than having to deal with the consequences after you’ve agreed to follow through on something that you realistically aren’t able to uphold in the long run.
If refinancing your home or your financial settlement is general is a concern to you, reach out and let’s have a conversation to talk through whether or not the agreement you’re considering makes sense for you! Financial settlement analysis could help you get a clear picture of what you can or can’t agree to in your settlement to support this next phase of your life. You can click here to schedule a complimentary call or go here to learn about divorce financial planning and financial settlement analysis.
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