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Many married couples who end up separating or getting divorced must deal with a jointly owned home as part of the negotiations in the settlement process. In many cases, this home is the largest asset for them to decide how to split.
In many cases, one spouse gets the home as part of the settlement, while the other moves out and must find a new place to live. In other cases, the home is sold and the proceeds added to the other assets in the settlement; in this case, both spouses need to find a new home.
This means that, when separation and/or divorce happens, at least one of the people in the situation may need a mortgage or another form of financing in order to afford another place to live. This can be complicated, for a number of reasons. The purpose of this article is to discuss the options that face people going through this situation, as well as how you can get out of a jointly held mortgage.
It is important to note that the advice in this article is aimed at couples who are legally married and in the process of separation or divorce. People who are in a common-law marriage and are ending that relationship would proceed differently.
The Impact of Separation on Mortgage Options
In Canada, the process of entering legal separation involves the creation of a written Separation Agreement. This typically includes custody of any children they have together, visitation, child support, alimony/spousal support, and the separation of debts and assets – one of which is generally the family home.
This Separation Agreement indicates how the financial obligations of both spouses will be managed as well as the division of all assets and property. This Separation Agreement should be settled before you finalize your divorce.
How to Leave a Joint Mortgage
This portion of the article is also relevant for people in common-law relationships or people who are not legally married but who may have bought a house together, such as investors looking to use the property for rental income, or friends or relatives who bought the house to share as a residence.
Remember that while you might feel a great deal of emotion about the house and your relationship, the most important factors in getting your name off the loan has to do with satisfying the risk concerns of the lender. Your lender invested a significant amount of money to help you buy the house, and before you can leave the mortgage, it has to be taken care of.
As long as your name is attached to the mortgage, you have financial liability toward paying it off, even if you do not live there anymore and have no connection to the property. That liability will remain on your credit history as a part of your debt-to-income ratio, potentially affecting your ability to take out another mortgage or borrow money for other purposes.
Your soon-to-be ex might promise to pay the mortgage punctually, which would help your credit if your name is also on the loan. However, as long as your name is attached, if your former partner runs late on a payment or goes into default, you would remain liable, and your credit history would be affected.
Another factor to consider with respect to finding a new mortgage is the amount you are obligated to pay for child support and/or spousal support. These numbers would appear in your Separation Agreement, which needs to be finalized before you even think about taking out another mortgage. These obligations will go into the math of your debt-to-income ratio, because it restricts the amount of money you have to pay toward a new mortgage each month. If your agreement has those support amounts set at zero, the lender would need to see this in writing before considering your loan application.
On the other hand, if you are going to receive child support or spousal support, this could count as income for you and increase the amount of financing you would qualify for. In most cases, though, lenders will not count support income as more than a third of your total income.
Another reason to wait for the finalization of the Separation Agreement is that, while your divorce is still up in the air, your soon-to-be ex could go after you for new assets you accumulate during the separation period, including a new home. This is why lenders will not take the risk of lending to a person in that situation.
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Documents You Will Need
Bank statements are a part of any mortgage application, and that is also true if you want to claim support payments. You will need a minimum of three months of statements showing that the support comes in regularly from your former spouse’s account to your account. Bank-to-bank transfers are seen as much more reliable than cash payments. That way the lender realizes that the support is a reliable form of income. If your former partner can set up Auto-Pay, that is even more valuable for your financing application.
If you are thinking about buying out the share that your soon-to-be ex has in the house, you must first calculate the current fair market value of the property. You can hire an appraiser to provide this number. Once this report comes back in and you and your spouse agree on the number, the next step involves calculating the equity that remains in the home. You find the equity by subtracting the balance remaining on the mortgage from the fair market value. You also subtract any costs of disposition, such as selling costs.
The Process of Taking Your Name off the Mortgage
One common way to do this is for you and your spouse to sell the home, which means neither of you will occupy it. The cash that remains after the sale will be divided between the two of you. For many couples, this is the simplest option.
Another option involves one spouse buying out the other to remain in the house. In this case, no cash transfer is necessary. In the Separation Agreement, the party remaining in the house assumes the mortgage. As part of this process, that party has to qualify again for the mortgage on the basis of their own assets and income. After this takes place, the other party is released from the mortgage. The cost of this can range from a few hundred dollars to a thousand, depending on the lender, for the price of processing the change.
A buyout can also take place involving actual funds moving from one person to the other. This often happens in cases where the house retains equity and the party who wants to stay there refinances in his or her own name to up to 95 percent of the appraised value. This frees the other party from the mortgage and should release enough equity funding for the other party to find a place to live. In situations like this, the party remaining in the home may not take cash out of the property’s equity for personal use. It is required that the person staying in the house have the income and assets to qualify for a mortgage independently.
Refinancing a mortgage after divorce is similar to the process of mortgage assumption because the party remaining in the house takes control of the mortgage from the partner. If the party remaining in the house has been used to living with a dual income, keeping the mortgage up can be a challenge. In the case of a refinance after divorce, an appraisal is often required.
What Happens if There is No Equity?
Maybe you just bought the house recently and only put five percent or so down. In this case, it is likely that you have not built up enough equity for a buyout or refinance to take place. In some cases, where negative equity occurs (such as in a drop in market value soon after the purchase), you do not have the option to sell it. If this is the case, then you have to keep the house until it has enough equity for sale.
One way to make this work is to lease the house to a tenant at fair market rent. If you set the rent so that it covers the cost of the mortgage, insurance and taxes, then the situation could be cash-neutral. When the house has built up enough equity, then you can sell it.
However, this can often keep you from getting another mortgage, because you are both still attached to the matrimonial home until you can get enough equity to sell it.
Canada offers a mortgage program permitting one party to buy the interest of the other party so long as there is at least five percent equity in the property. The down payment can be as low as five percent of the market value of the property. So if the two of you own a house and have 20 percent equity, you can take out 15 percent of it to help the other spouse get started in a new place or pay off other joint debts that you had accumulated.
If you follow this program, one of you has to remain in the home as the owner-occupier, as the home cannot turn into a rental property. The person who wants to remain in the home must have the income and credit history to qualify for the mortgage independently of the other spouse.
Steps You Can Start Today
During the process of moving toward a Separation Agreement, it is time to start establishing yourself as an independent financial individual. That means that you should close any accounts that your spouse might have opened in your name, so that you cannot be held liable if your spouse undertakes debt on those accounts and then misses a payment. Your credit will dip after you close an account, so go ahead and open a new one in order to get your credit moving back upward.
Do you two have joint credit cards? It’s time to cancel those as well, and then apply for one or two of your own. Don’t apply for more than two, because multiple inquiries at the same time can raise a red flag for potential lenders and harm your credit score. Only apply for cards that serve people with your credit profile, so that you don’t have rejections.
Make all of your payments on time, particularly credit and debit payments. That keeps your payment history solid, so that the other changes to your credit history will have a minimal impact on your ability to secure financing going forward.
It is not uncommon for one or both parties to experience damage to their credit which eliminates traditional mortgage options. In such cases, a short term alternative private mortgage may be required to provide a bridge to get over the hump
You might consider visiting with a financial specialist to go over your situation and help you come up with a plan. Separation and divorce are chaotic times in a person’s life, not just from an emotional standpoint but also because of the ways in which practical logistics are changing. A financial advisor can provide you with insights specific to your situation.
When you separate and divorce, decisions will come that influence your life for years, even decades, going forward. What will happen to the family home? Where will you live? What will happen with your children? How often will you see them? Arriving at a Separation Agreement will help you resolve a lot of the uncertainty in a collaborative way.
When you are ready to start thinking about where you will live next and to start moving toward purchasing a new home, remember that you won’t get financing from a bank in Canada without a finalized Separation Agreement. So, first, hammer out those details, determining how to handle assets, property, joint obligations and the like.
Once you have those items in order, you are ready to start thinking about purchasing a new dwelling for yourself. Do you want to stay in the house where your family lived and buy your ex out? Or do you want a fresh start in a new place? Either way, there are steps to take to ready yourself for qualifying for the financing that will allow you to stay in the house – or to begin again with a new one. How you’ve handled your finances during this rough period will directly impact the type of financing you may need to proceed with; traditional/conventional, semi-traditional, or private.