Separation or divorce can be devastating emotionally and financially. It’s not an overly enjoyable topic to write about; however, it’s a harsh reality for some and there are a few things to be aware of when it comes to mortgage financing.
The most important thing to do if you’re going through a separation or divorce, at least financially speaking, is to create a separation agreement. This will ensure that all parties are on the same page and understand what they’re entitled to and what ongoing payments or obligations they’re responsible for. No bank will entertain any type of mortgage financing until this is legally in place to ensure that their interest (and yours) is protected.
Every situation is unique – some couples sell the home, some live in different rooms, some keep the home for the children, some buy new individual homes, some rent, and so forth – the proposition of buying your ex out, however, is very common. The partner who wishes to remain in the home will usually have to refinance to raise the equity to buy out the other partner. It’s important to determine if a) you’ll qualify for a large enough mortgage and b) if you can actually afford it in your post divorce life. Currently, under the Canadian mortgage rules, you can refinance your home up to a maximum of 80% of the appraised value. That said, if you don’t have sufficient equity in the property to do so, CMHC offers a unique spousal buyout program, which enables you to push this up to 95%.
Regardless of whether you’ve been bought out by your ex or sold the family property and divided the proceeds, you’ll need a place to live. Some will live with family. Some will rent. The adventurous ones may pack up the VW and hit the road. And some will buy a new place (with a separation agreement in place, of course), thereby requiring a new mortgage. If you’re neither receiving nor paying support of any kind (alimony or child), then it will just be a standard qualification. However, if you’re receiving support payments, lenders will scrutinize your income differently based on the terms set out in the separation agreement (i.e., age of children, duration of marriage and payments, etc).
Conversely, if you’re the one making the support payments, these will be factored in dollar for dollar into the mortgage qualification process and can have a substantial impact on what you’re able to do. Today, each $500 of monthly support payments will reduce the amount you qualify for by 90-100K! So, if you’re looking to go the new mortgage route, make sure you know your qualifying position as a newly separated or divorced individual to avoid any unpleasant surprises.
One of the biggest mistakes, and not just for the newly separated or divorced, is to assume you still qualify for what you once did. Regardless of support payments, etc., the rules are constantly in flux and many people are shocked when they find out that they don’t even qualify for what they have.
Next, we can’t emphasize this enough, but don’t stop paying the current mortgage! No matter how bad the marriage is, don’t throw away your financial future out of spite or frustration. Missing a mortgage payment reflects poorly on both partners and will likely impede securing a mortgage afterwards – at least in the short to medium term.
Last, make sure both partners have credit. Far too often, credit cards, lines, and loans will be in both partner’s names, but one is the primary holder because they’re the breadwinner. All of the credit being built will only be in that person’s name and, more often than not, the other partner is shocked to find out that they haven’t built any credit at all – this will not get you a mortgage. In general, banks want to see two credit facilities established for at least two years (in good standing) to be deemed mortgage worthy.
All in all, getting separated or divorced is a life altering event and an ensuing emotional and financial roller coaster. But, it happens. Every January (the national divorce month), mortgage inquiries spike for people looking to buy out or just move on, so hopefully this information will assist you on the financial side of things so that you both come out in an OK position and avoid some of the unnecessary stress we see far too many people experience. Good luck!