When couples take wedding vows, it’s safe to say that virtually none of them anticipate their relationship ending at some point in the future. However, in Canada, the divorce rate is around 40 per cent, and that doesn’t include the common-law relationships that end in separation. Divorce or separation in Canada can lead to financial chaos, and so taking out a mortgage shortly after that major life change can be complicated. Potential lenders will want to see a divorce decree before they will let you go to closing, but it’s nothing to take personally. Lending decisions are all about the calculus of risk versus reward. Let’s take a look at why mortgage lenders want to see those decrees as part of due diligence – and the risks of approving a mortgage to someone freshly out of divorce court or the end of a long spell of living together.
Why do lenders need to see your divorce decree?
Don’t worry – lenders don’t want to read about the tawdry details of the end of your relationship. With mortgage providers, the curiosity begins and ends with your ability to make the payments each month.
Part of this involves checking your debt-to-income ratio. As long as that number is at or less than 36 per cent, you have a much better chance of gaining approval. Your divorce decree contains details that will help your potential lender make that decision.
Are you going to receive spousal support as part of the agreement? That could improve your debt-to-income ratio considerably, so if your current salary is on the lighter end, then that monthly support could swing the decision in your favor.
The divorce or separation agreement could also leave you with assets such as retirement accounts or other money that had previously been held in common. If you’re looking for some additional equity to make mortgage approval more likely, that information could come in handy.
A divorce decree also provides hard proof that your marriage has come to an official end. If you buy a home while you are legally married, that home is automatically community property. If you try to buy a home while you are still married – even if you’re separated – there could be confusion about who is the responsible party for making payments. The divorce decree will have the legal date when that relationship – and its shared financial obligations – came to an end.
What should you do before you reach out to a lender?
Are you officially divorced yet? Or are you still in the process of working that out? If your divorce is final, get in touch with the staff at the courthouse where your case was handled. They can provide you with an official copy of your decree with a stamp and legal signature. Your lender will need that as part of due diligence.
Are you still in the process of working everything out? You can still provide your lender with a copy of the provisional agreement. Some lenders might even offer you some advice after they see where your current negotiations. Following that advice can help you in the loan qualification process. It’s important that you are clear and transparent about where you sit in the process of finalizing that divorce. The more open you are, the greater the likelihood of your gaining approval.
Can you get approval without a separation agreement?
If you don’t have a separation agreement, that elevates the risk considerably. Even an informal agreement can provide the basis for moving forward. However, an informal agreement doesn’t provide the lender with formal proof as a basis for assessing risk. It’s possible that a lender can provide conditional purchase offers on the basis of initial income qualification, but without signatures and official seals, the risks associated with those loans are significant – perahsp significant enough to keep approval from happening.
What risks does the lender face when dealing with clients coming out of divorce or separation?
In Canada, only about 4 per cent of the mortgages that people take out end in default and foreclosure. While not all of those happen to people taking out a home loan right after a relationship has come to an end, divorce is a seminal moment in life – right up there with the sudden and unexpected loss of a job or awful news from one’s doctor. When a couple rely on the income from both partners to meet their financial obligations, the end of their relationship can cause their existing mortgage, if they have one, to fall into delinquency or even default. Solving that problem might involve selling the prior house and finding new places for each person to live. Reordering lives can also have psychological consequences for both partners – which can cause problems at work, leading to more potential financial problems.
Other risk factors that lenders face when dealing with borrowers coming out of a divorce or separation include ongoing liability from joint mortgages.
- Divorce decrees do not automatically change mortgage contracts. Just because a divorce decree awards a house to one partner (along with the mortgage responsibility), the original mortgage contract remains in force. If both people remain on the mortgage contract, then both are responsible. It takes specific paperwork to take one partner off that loan.
- Your ex-spouse might not follow the court order. Even if your ex is responsible for the mortgage, if they don’t make the payments and the loan goes into default, the lender on that mortgage can still come after you for the amount owed.
- Every borrower on joint mortgages takes a credit hit when the loan is late. If you miss payments on a joint mortgage, that will ding everyone’s score. It doesn’t matter what the divorce decree says about actual responsibility for the note.
But what about a quitclaim deed?
That paperwork transfers legal title of the property, but it does nothing to ease the liability for the mortgage connected to the home.
One final risk to consider has to do with a number that can also help borrowers – spousal support. If you count that money as part of your income, you could need as long as a year of steady, consistent payments for the bank to allow that as part of your income. The reason for this is that spousal support payments (unless garnished from wages) are at the mercy of your ex. If something happens to those payments – whether your ex loses their job and can’t make the payments or just decides that they have paid enough already – then you could get into trouble with your new loan in a hurry. This is why lenders want to see a year of those payments in many cases instead of about half that in the case of job-related income.
Obviously, the better the numbers look from bank statements, asset statements, and the distribution of assets and spousal support in the divorce decree or separation agreement, the more likely a lender is to approve a new mortgage for a borrower coming out of that situation. If the numbers add up, that will overcome the hesitation that lenders may have.
Getting a mortgage without Divorce or Separation Agreement is a daunting task and is best addressed in advance so that the likelihood of approval is greater. If you have completed a Divorce or Separation, and Conventional Banks are still not willing to assist, Amansad Financial may have options available. Contact us for a no-obligation assessment.