Thursday, November 21, 2024

Dear Dollar Stretcher,
I am in the process of a divorce and want to keep the family home. Are there any programs out there for single parents that would offer a more favorable interest rate for re-financing?
--Sarah

Sarah's question brings good news and bad news. The bad news is that she's not likely to find anyone to offer her a lower rate because she's a single parent. The good news is that there are some things that she can do to stay in her home.

Only a non-profit agency would consider a special rate for borrowers like Sarah. Some do offer help for needy home buyers. But I'm not aware of any that will help with refinancing.

The reason that a regular mortgage company doesn't have special rates is simple. Her ability to repay the mortgage will be hurt by the divorce.

The mortgage company looks at a borrower's total assets and liabilities. They also compare the amount of income to monthly expenses.

Sarah's income will be going down. Even if she was the major family breadwinner, she's probably going to be taking a big income hit when her husband leaves.

Unfortunately, Sarah's expenses won't be going down as much as her income. Sure, some things like auto expenses could be cut in half. But it costs just as much to heat and cool her home as it did before.

In fact, some expenses could go up. The kids might still be covered under Dad's medical insurance at work after the divorce. But Sarah will have to pay for her coverage unless it's provided through her work.

What can Sarah do to be able to stay in her home? The biggest hurdle is to have enough income to afford it. Sarah needs to keep her housing expenses to less than 33% of her take home pay. That includes utilities, maintenance, property taxes and home repairs.

Some people in the mortgage industry might be willing to lend her more. She'd be foolish to do that. Remember that those who encourage her to spend more on housing won't be scrounging to find the money for the mortgage every month.

Do the math. Suppose she spends 33% of her income on her home. Add an additional 15% for auto and 15% for food. At this point she's already consumed 63% of her take home pay. That leaves 37% for things like child care, insurance, clothing, medical/dental, entertainment and everything else. Trying to take another 5 to 10% for housing will make her budget unworkable.

So how can Sarah increase the odds of success? Nothing flashy, but there are some simple things that she can do.

First, Sarah will want to set up a 'rainy day' fund for unexpected expenses. The truth is that they can be expected to happen. We just don't know exactly when they'll occur. She should put some money aside every month that it doesn't 'rain'.

Not only will there be surprise expenses, but Sarah might find that her income isn't secure. Even court ordered child support and alimony is not guaranteed. If she doubts that, she can check with a few divorced friends. Her Ex could face a layoff. He's likely to pay his own rent before sending her a check.

She'll need to have a plan for handling home maintenance and repairs. Routine maintenance can keep a small problem from turning into a major expense. That's important when money is tight.

Unless she has a very good income, Sarah can expect to sacrifice other desires to provide extra dollars for the house. She may find that she can keep the house if she's willing to give up an annual vacation or drive an older car.

Increasing her income is another option. One way to do that would be to share the house. It's possible that she could find another single woman or mother that could move in and help share expenses.

Finally, she should consider what it would take to convince her that she shouldn't keep the house. Better to make a thoughtful decision now rather than an emotional one later when the pressure is on.

Sarah needs to be careful that she doesn't slide into being 'house poor'. The first sign will be that she's a little short each month. Then an unexpected bill for auto or home repair pops up. If she uses a credit card she'll only delay the consequences. Borrowing money isn't the answer, it's the beginning of a serious problem.

Am I trying to scare Sarah? In a way, yes. I don't know the circumstances of her marriage. But I can tell her that every day questions come in from single parents who are worn out from the continual struggle with bills.

Most families with children need two incomes to make ends meet. Some are able to make it on a single income if one parent stays home and uses their home management skills to reduce expenses. But it's very hard for a single parent. For instance, cooking from scratch isn't realistic if you're working full time.

It's understandable that Sarah wants to stay in her home. And, naturally I'd like to see her have the best for her family. But she'll need to be very careful to make sure that she makes an intelligent decision and doesn't let a house drag her family down into financial quicksand.

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