What Happens to Your Mortgage During a Divorce or Separation?
How to Handle This Difficult Situation With Care
Breaking up is hard to do, as they say, but throw a mortgage into the mix and things can get complicated. To help you and your partner navigate a tricky situation you likely never imagined yourself in, this article will explain how divorce affects a mortgage that’s in both spouses’ names along with the different options you have in regards to the mortgage and property.
How Divorce Affects a Jointly Held Mortgage
Unfortunately, your mortgage does not care if you and your spouse get a divorce. The best option is for you and your partner to put your heads together to figure out what you want to do with your marital home, and what steps to take next.
Steps to Take When Considering a Separation
Determine How Much Equity You Have
The first thing to do would be to calculate how much equity you have on your home. To determine the equity, you will have to subtract the amount you owe on all loans secured by your house from its appraised value. You can get your house appraised through a mortgage expert who can refer you to a proper appraiser.
Come to An Agreement on Keeping Vs. Selling the Home
Once you have mutually decided whether or not you will be selling or keeping the home, (and how you will proceed with doing so) keep everything documented as a mutual agreement, just in case. It has been suggested to include this in the divorce settlement as well, as detailed as possible to avoid conflict or miscommunication in the future.
What Are Your Options?
Sell
If you have significant equity in your home, one option is to sell the house and split the profits 50/50 after paying off your loan. This is an idyllic situation where you and your ex-partner can walk away with minimal conflict.
Refinance
Refinancing under the name of one spouse is another agreeable way to split the mortgage between a divorcing couple. It’s costly, between paying legal fees, appraisal fees, and possibly a discharge fee from your existing lender, but it allows one spouse to take sole custody of the house and thus reducing any risks of further complications. When refinancing, the individual keeping the home must prove they can manage the mortgage debt on their own and meet the following criteria to qualify:
- The couple must be up to date on their mortgage payments
- At least one spouse has a good credit score and history and a sufficient income
- At least one spouse agrees to leave the home to the other
Keep the House with Both Spouses on the Mortgage
This option is not usually the most favourable, but it works as a last resort. If you aren’t able to sell or refinance the house, keeping it with both names on the mortgage and having one of you move out might be an option. This choice is often controversial because the couple wouldn’t be relieved of mortgage payments and other house related costs on any future loan or credit applications. This means you will have to maintain communication with one another for anything house-related, perhaps even after your divorce has been finalized. If you are separated and trying to work things out, this is possibly the better way to go until you have figured out how you would like to proceed with your relationship.
Have One Spouse’s Name Removed from the Mortgage
A nice and clean way to walk away from your joint investment is to have one spouse’s name removed from the mortgage, leaving the other spouse responsible for making the payments each month.
This, unfortunately, means the spouse being taken off of title and off of the mortgage will not receive any money, because the spouse keeping the property did not increase their loan amount to pay the other partner their share of the equity.
One Spouse Buys the Other Out
This is an optimal solution that benefits both parties. It involves splitting the equity that you built as a couple and buying the other spouse’s share, so that you can take full ownership of the house.
A buyout can often go hand in hand with refinancing, however, a refinance can only go up to 80% of the value of the home, whereas the spousal buyout can go up to 95% of the value of the home.
Consult with a mortgage expert to find out how you can proceed with applying for a new mortgage loan in your name with a lender to pay off the previous loan and pay your ex what’s owed for the buyout.
Also keep in mind that you must also satisfy mortgage default insurer guidelines (CMHC, Sagen, and Canada Guaranty).
With the help of a mortgage broker, you can get out of this sticky situation intact, with a profit, or even with your house. Just be sure to keep all parties informed and involved when deciding how to approach things and this difficult process will hopefully not be further complicated.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.