September 26, 2020

Mortgages and divorce: Know your options

Sadly it’s a reality that while the divorce rate is declining in Canada, a report released in 2012 still claims that 42% of marriages will end in divorce and more people file for divorce in January than any other month of the year – hence the reason for today’s post.

It is important to know what your options are when it comes to the second most common legally binding agreement you’ll ever enter into, next to a marriage – your mortgage.

First, you are legally married until the court recognizes otherwise. So, without another legal document stating that you are separated or divorced, you are still technically married and this means that you need your spouse’s permission if you wish to buy another property, sell the current one, or buy your spouse out of the current property.

You have three basic options to move forward:

1. Keep the original mortgage
2. Sell the house
3. Refinance to enable one spouse to buy out the other’s equity

Keeping the original mortgage is an option that most people unknowingly take after a divorce. This is when one person decides to keep the house but both names are still on the mortgage after the divorce. The downside to this is if your former spouse doesn`t make the mortgage payments, it can damage your credit if he/she defaults on the loan.  In addition, if the spouse in the home gets remarried or even has a common-law relationship and this individual resides in the home, they will have rights to the property as well which can complicate things.

If you both decide to sell the house there are some additional things you should consider:

1. What is the value of the property? In most cases this asset will in all likelihood be split between you and your spouse. However, the formula for this division is set out by the courts.

2. What is the penalty you will pay to get out of the current mortgage? If you break the contract early, whether you sell or refinance to buyout a spouse, you will likely incur a penalty.  Contact your lender or mortgage broker to find out exactly what your penalty will be so that you can make an informed decision.

3. How much will it cost you to sell the house and potentially buy a new property? Remember to include realtor fees, lawyer fees and closing costs.

The other option is where one spouse, who wants the house, buys out the other spouse`s equity share and refinances the mortgage in his or her own name only.  We can actually do this as a “purchase” by one spouse with as little down payment as 5% – typical refinances can only be done up to 80% loan to value but with the dissolution of a relationship, lenders will make and exception.

The spouse who is “purchasing” the home, can buy it for the current mortgage amount plus the amount stated in the legal separation agreement as the buy out amount.  He/she will have to qualify for the mortgage on their own, including any child and spousal support payments, if they are the payor of the support.  The key to this option is that a legal and fully executed separation agreement needs to be in place.

One of the most important things to consider when leaving a marriage is to maintain a healthy credit score. This will ensure financial independence and give you a good start to approaching home ownership solo.

If you want to qualify for a new home purchase on your own, you will need good credit to accomplish this. Take into consideration your income and how much you can afford. (Note: if you are getting alimony or child support, most lenders want to see three months of payments deposited to your account before considering your application.) Government Child Tax Benefits and Universal Child Care Benefits are not accepted by most lenders as forms of income and if you have no other income other than spousal and child support you will be very limited in the lenders available to you.

Going through a divorce is a difficult time and finances may not be your priority however, it should be. By getting the legal documents out of the way and sorting out the mortgage, it can help make moving on a little easier.  Avoid unnecessary expenses and heartache down the road with the mortgage and credit, sort it out first, then you can move on.

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