Retired, divorced, and buying your own home: navigating the home-buying process in a post-divorce world

Divorce is complicated, but it doesn’t have to be the end of your home-ownership journey.

Going through the process of a divorce is challenging enough all on its own, but determining who will-live-where and who-will-keep-what often adds to the mountain of emotions you are already experiencing.

  • Should you stay or should you sell? 
  • If you stay, should you refinance and buy out your ex? 
  • If you sell, will you qualify to buy a new home on your own? 

Leaving your family home full of memories will be challenging, but it’s time to consider what you want next. Plan it out. As you prepare to purchase your first post-divorce home, consider the pros and cons to each home you’re looking at, as well as your loan options; and don’t forget the lifestyle and financial implications of each.

If it’s been a while since you last purchased real estate, you should know that things have changed. According to the National Association of Realtors, women weren’t legally allowed to obtain a mortgage without a male co-signer until 1974 and the approval of the Equal Credit Opportunity Act. Since then, the rates of female homeownership have continued to rise–in 2021, 19% of homebuyers were single women, and 8.2% were single women over 55.

Regardless of how long it’s been or whether you’ve done this by yourself before, you must be prepared with the confidence and know-how to tackle this chapter, all on your own. 

Don’t be afraid to shop around for the best lender or the best rate

Your first step should be talking to a qualified mortgage lender. It wouldn’t hurt to shop around for one that has experience working with post-divorce retirees. Though single women own more homes than single men these days, they also pay higher mortgage rates. There are a few thoughts behind this, from lower credit scores and subprime loans, to an unwillingness to negotiate, but the evidence isn’t entirely clear. What is clear however, is that women–especially those in retirement–must be willing to shop around and negotiate for the loan and rate that is best for them.

I have a great independent mortgage broker I can introduce you to if you’re looking to explore a home purchase.

In fact, he recommends that you and your spouse discuss and plan who will keep the house before you file for divorce. He says that you should consider speaking with a qualified mortgage broker before you reach out to a divorce attorney. Because once you file for divorce, the options for your home can begin to diminish. 

Be realistic

Qualifying for a mortgage this time around may feel different from the last time you bought a home. Your circumstances (and income) may not be what they were when you were married  and working, but that’s ok.

It’s important to first determine your price range before spending too many hours scrolling through home listings on Zillow. Once you know that range, you can then decide what type of home will be right for you in the future. Maybe you’ve always wanted to live in a modern cabin in the woods, or a luxury condo overlooking the ocean. Now is the time to consider what will bring you the most joy (and bang for your buck). Owning a home will continue to offer you stability and control over this part of your life, while also generating tax benefits and equity.

What factors are considered for a traditional mortgage?

During the pre- approval process, lenders will review a number of factors in order to grant a mortgage approval.

These include:

  • A good credit score. This is the most important factor in determining your mortgage rate. Be sure to preserve this as best you can during the divorce. Avoid late payments and monitor all open accounts (even if they’re the responsibility of your ex). 
  • A source of income. Previously, W-2s or check stubs may have worked, but in retirement, be prepared to provide alternative sources of income. Retirement benefits, pensions, property investments, social security income, alimony or other monthly income may be considered.
  • A solid ​​debt-to-income ratio (DTI). DTI is calculated by adding up all of your monthly debts and dividing that by your gross monthly income. It is dependent upon the type of loan you’re applying for, but lenders generally prefer this number to be around 36%. If your credit is high enough, you might be able to go up to 50%. This means that all of your monthly debt (including car, credit cards, and any other loan payments) plus the monthly mortgage payment (including property taxes and homeowner’s insurance) must be 36% – 50% or less of your gross monthly income. A more conservative and comfortable DTI ratio is 28% or less.
  • A down payment. As a retiree, this amount can vary, depending on the income method used and the type of loan acquired. Either way, you should be prepared to put anywhere between 5% and 30% down. Be extra mindful of borrowing a down payment from an IRA or another tax-deferred retirement plan, unless you don’t mind bumping up to a higher tax bracket next year.

What about income?

Commonly, most people qualify for a mortgage through their income. But as a retiree, what happens if you have a lot of money, but not a lot of income? You could temporarily tap into your retirement accounts to prove you can afford the loan. If you have enough invested, this could act as your source of income. This technique, known as “asset depletion,” will evaluate the current value of your assets. Your lender will then deduct closing costs and down payments and divide 70% of the remaining amount by 360 months to determine your monthly income.

How about the loan period?

Something else to consider is your loan period. You probably had a 30-year mortgage on your last home, which helps keep those monthly payments lower, but as a retiree, many lenders might not be comfortable with that time period. These days, they’ll probably want to fit you into a 10-15 year loan. The monthly payments may be higher, but look on the bright side, you’ll be paying much less in interest!

I almost always recommend a 30-year mortgage as the lower minimum payment gives you more cash flow flexibility each month. You can always pay more each month and have the loan paid off in 15 years, or another time frame, if you so choose.

Non-mortgage loans may also be an option

There are additional options if acquiring a traditional mortgage won’t work for you. Of course, you’ll want to consider the advantages as well as the risks, and speak with a trusted advisor before determining if this option works best for your financial situation.

  • A “margin loan” is basically an interest-bearing loan which allows you to borrow against the value of non-retirement investments you already own. This option could raise your purchasing power, will give you access to cash without having to sell your investments, and you won’t incur the closing costs and fees that you might find on more traditional home loans. Interest rates are often more favorable too.
  • Pledged Asset Mortgage (PAM) might make more sense if you’re in a higher income tax bracket. This option involves borrowing against your brokerage account and the assets will be used as collateral. These types of loans may provide better interest rates and repayment terms, as well as reducing the down payment that is required. Some borrowers assume they’ll lose ownership of their valuable possessions, and while you will transfer the pledged asset to your lender, you will still maintain ownership of your assets as long as your mortgage remains in good standing.

What’s next?

Divorce can be challenging and emotional, but your next chapter doesn’t need to be. It’s time for you to live life greater on your own terms. I partner with women in their 50s and 60s to help them make smart financial decisions and to feel confident in retirement. Women face many challenges when planning for their financial future, which is why I’ve developed a personalized approach unique to each of my clients and their lifestyles – no cookie cutter advice here. Get in touch anytime; I’m happy to discuss how we can prepare together for your next chapter in life and retirement.