Can you get a home loan with divorce debt?
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Real scenario - Dave & Lucy
Dave (a fire fighter, making around $90K) & Lucy (school cleaner, making $50K) are looking to buy their first home for around $700K. Dave has $6,000 residual debt left over from a divorce, but has a solid employment history. He's a hard worker and takes all the over-time he can get. Lucy is a casual worker doing full time hours. She is never without a job and makes around $50K. They are good hard working people.
Borrowing power
At an initial glace Dave and Lucy should have the borrowing capacity to service a $700K loan. But there situation becomes complex when you consider their debt situation. Let's take a closer look
On top of the residual divorce repayments, they have two car loans totaling $75K. Their repayments are $2,800 per month, which in itself is a home loan repayment. They have proven they can repay a loan. But each debt is like a commitment which takes away from their serviceability a great deal.What about the deposit?
Deposit - $35,000, which sits at less than 5%. This is not necessarily a problem, but coupled with the debt, will prove complicated and tough to get approved.
Point of Interest: considering the money they make, and the 12 plus years they have been married and working together, it is reasonable to wonder why their deposit is only $35K. The lender will certainly be questioning this, and their sincerity of paying back the loan. It's important to reign in your spending before approaching a bank. Let them know you take making repayments your first priority.Guarantor to the rescue?
Now Dave's grandmother has agreed to go guarantor. Which adds to their borrowing strength.
Problem is: the guarantor is on a government pension & is risking her only residence. The banks will not accept this, as they consider her to be a vulnerable person who could not afford to lose her primary residence. She would be liable for around $140K, which is around 20% of the $700K loan. Without selling the house she would not have this amount.What now?
Dave & Lucy were given an action plan as follows below.
Keep saving and paying Down that debt. In March you'll have $50K in savings for your deposit and the $6,000 divorce settlement loan will be fully repaid. We can use that $850 per month to work for your serviceability. If you have a company work car, consider getting rid of your personal car. This will reduce your outgoing commitments and help you service for your home loan. You must prioritise!- SO LET'S TALK AGAIN IN FEBRUARY.
Matthew Stack
matthew@mortgagebrokerrevesby.com.au
0423 237 242
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