How to Buy Out Your Spouse’s Equity During a Divorce
How the Spousal Buyout Program Can Help You After a Split
When going through a divorce or separation, dividing assets and deciding who gets what can be a stressful process. Many separated couples find that deciding what will happen to their home is one of the hardest decisions to make. Selling the home and splitting the equity is an option, but in most cases, at least one partner wants to keep the home.
Fortunately, there’s a solution that lets one spouse keep the home, while the other can still walk away with their share of the equity. This is called the Spousal Buyout Program.
Read below to learn about how this option can help you, and what steps are required to complete a successful, stress-free spousal buyout.
What Does It Mean to Buy Out Your Former Spouse?
When someone “buys out” their spouse, they are participating in a transaction: the buyer gives back their spouse’s half of their home equity for full ownership of the home – or its mortgage.
READ MORE: What Happens to Your Mortgage During a Divorce or Separation
About the Spousal Buyout Program
A shared home is an asset, and its often the most difficult asset to determine the eventual owner of during a divorce. That’s because couples often make equal or nearly equal financial contributions towards a home, and share its sentimental value. Plus, it’s not realistic to take turns living in the home, or cut it in half and each take a piece.
The Spousal Buyout Program offers a compromise that leaves the home with one spouse, while giving the other what they are financially entitled to.
Both parties will need to agree to this transaction, and must do so under a legally-approved Separation Agreement. The agreement should be drafted by two lawyers as opposed to a mediator, as some some lenders don’t recognize separation agreements drafted by mediators. Some lenders won’t even accept separation agreements drafted by a mediator or templated from the internet, even if signed off on by two different lawyers.
They must also determine the amount owed by subtracting the exiting partner’s half of the equity from the amount owed on mortgage loans. Read more about the specific steps of a spousal buyout below.
What Does This Process Look Like?
Determine Who is Staying in the Home
A spousal buyout is a compromise that emphasizes fairness, and ensures that each person comes out of it with a relatively similar value. Still, one person will ultimately stay in the previously shared home, while one will leave. In order for the spousal buyout process to work, you will both need to decide who will remain in the home.
Negotiate a Legally Binding Separation Agreement
A Separation Agreement allows both parties to negotiate the terms of their divorce under protection of the law. Both spouses must agree upon this contract, which sets rules that pertain to aspects of the divorce, like child custody, division of assets, and how to resolve further disputes.
Ultimately, having a Separation Agreement will make the entire divorce process quicker and easier, as you will not have to go back and forth with lawyers each time the divorce progresses.
Determine the Value of the Home and Your Equity
There are two important factors to consider during this process: your home’s property value and your equity.
Your home’s property value is, essentially, the price it could hypothetically be sold for. This value is determined by a professional real estate appraiser, and is affected by plenty of factors, including, but not limited to lot size, the surrounding neighbourhood, number of rooms, and features in the home. The current state of the housing market would also play a role in your home’s property value.
You will also need to determine your equity. Under a mortgage payment plan, this value represents how much of your home you technically “own.” In other words, you can determine this value by subtracting how much you owe on mortgage loans from the full appraised value of a home.
If your home is appraised at $400,000, and you still owe $100,000, you have an equity of $300,000, or 75%.
In reality, determining your equity is slightly more complicated. Equity is also affected by changes in the housing market and your home’s property value. It’s recommended that you work with a mortgage broker to find a licensed appraiser who can precisely determine your equity.
Calculate the Buyout Amount
When a married couple owns a home, each is entitled to 50% of its equity. Under the spousal buyout program, the person who will stay in the home must “buy out” the other’s equity. They will become the sole owner of the home, while the exiting party will be given the money that was previously represented by their share of the equity.
To determine how much this will cost, take the following steps:
- Determine your shared equity.
- Divide that number by two to determine each party’s individual equity.
- Add the exiting party’s equity to the amount still owed on the mortgage.
The price you end up with is the amount of money required to buy out your spouse’s equity.
Buyout
The spousal buyout program allows one party to borrow up to 95% of the value of the home, while having access to best rate mortgages and an insured program such as CMHC, Sagen, or Canada Guaranty. These funds will be used to buy out the other spouse’s equity in the home.
Walk Away with Both Parties Satisfied
In all honesty, it’s rare for both parties in a divorce to leave with 100% satisfaction. However, the Spousal Buyout Program ensures that, at the very least, the right to one indivisible asset is given fairly. While one party keeps the home, the other is paid back their portion of ownership, which is often the most reasonable way to settle the decision on who gets the home, aside from selling.
READ MORE: How to Refinance Your Mortgage
A divorce is bound to be stressful – and the added element of real estate surely doesn’t help. If you need to determine what will happen to a shared home following a divorce, a spousal buyout could be the solution to your problems. Talk to a mortgage broker to learn more about how this process can help you.
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.