Mortgage Options on Divorce or Relationship Breakdowns

Prior to Divorce, there is Separation

First of all, it is important to understand that Separation is the process whereby partners reach written agreement on custody arrangement for any children, child support, spousal support and the division of the relationship's assets and debts, often including the home and related mortgage. A Separation Agreement deals with how the financial obligations of both parties will be split, while divorce (if the parties have been legally married) simply means the marriage is legally ended, and both parties are free to remarry. Separation Agreement comes first. 

It is also important to note that other relationships (besides marriage) can breakdown. For example, that of a common-law couple or siblings who bought a home together, or an adult child becomes estranged from Mom & Dad who had previously co-signed the mortgage. These are all examples of a dissolution of a relationship, for which the options below will apply equally.  In all events, however, you do need to reach agreement on splitting up your joint financial affairs first.

"Life isn't about Waiting for the Storm to Pass. It's about Learning to Dance in the Rain."

Separation - the Easy Way vs. the Hard Way

Things aren't always easy during a separation, but it is incredibly important that you get started on a separation agreement right away none-the-less. The process of legally separating your affairs will go much easier if both parties understand the necessity of the steps that need to be taken and agree to cooperate as best they can. In less cooperative scenarios, the separation agreement will require the help of family law lawyer representing each party and potentially a trip to court. This can be unpleasant and significantly more expensive for both of you. In the absolute worst case, one of you drags you both into bankruptcy and foreclosure through failure to cooperate and emotionally charged irrational behavior (sadly this happens with some regularity). 

As it relates to property and debts acquired together during a relationship, there are some excellent guides available on the internet. Please educate yourself and share with your partner. These sample checklists and guides can help you to begin to think logically through the process and remove some of the emotion. Learn what will fly and what won't if it ever gets to court.

Separation Checklist - What Needs Doing 

Property Division for Married and Unmarried Couples in Alberta

Property Division upon Separation and Divorce or Death of a Spouse in Ontario

Property & Debt - Family Law in BC

Sample Separation Agreement

You can also Google "property division divorce" followed by your province to come up with more resources.

Your goal is to get you and your partner on the same page as to next steps so you can both part ways ASAP and both end up with clear financial options as they relate to obtaining mortgage financing for the current property or a future purchase. Mortgage options can only be explored once you are both very near agreement on the Separation Agreement. This concept is explained next.

The General Issue

A mortgage is a financial obligation. From a mortgage lender's point of view, before anyone heads out to buy another property, they want (and require) the parties to the existing mortgage to properly deal with that one first.

Keep in mind, as long as your name remains on the mortgage, you are financially liable for the debt even if you no longer occupy or have anything to do with the property. Being financially liable will impact your ability to borrow (or not) in the future. So even if you or your partner is going to keep the home and agrees to pay the mortgage, as long as the other's name remains on the mortgage, they too are responsible for the payments if the other party defaults (illness, job loss, revenge, etc.). There are numerous ways this could play out and sink your ship!  Don't go there. Certainly, mortgage lenders won't.

The less obvious issue as it relates to future mortgage qualifying is that of spousal and/or child support obligations. These financial obligations are to be spelled out in the Separation Agreement. If there is no agreement, then you will need one before talking to mortgage lenders. Here's why:

Any payment obligations are viewed as monthly liabilities, as such will limit how much you can safely borrow on your next mortgage. Even it the payments are going to be zero, lenders need to see that in writing before they will approve you to borrow again.

TIP - We have a lender that may allow us to deduct your payments from your gross income rather than add it to your monthly liabilities, which is a huge benefit in improving your Total Debt Service Ratio and expanding your mortgage options.

Conversely, any support payments received can be viewed as income, which - if combined with other employment income - can help increase your access to mortgage funds. (NB: support income generally cannot exceed 1/3rd of your total income mix for mortgage qualifying purposes.)

TIP - Lenders will likely ask for bank statements to prove the payments are reliable and match the separation agreement amounts. You will have best mortgage approval results if you can demonstrate bank-to-bank transfers (no cash) on regular payment dates (auto-pay is best) with no missed payments or hiccups. Even if you don't know the exact amount that will be approved, start the flow early and reliably as you will need that going at least 3 months. 

 

So let's assume that you have a Separation Agreement, or in the case of uncontested, no assets, no property, no kids, a lender may accept a Statutory Declaration instead.

Some options for getting out of an existing mortgage and preparing yourself for the next are listed next.

Options for Getting Out of a Joint Mortgage

"Equity is the difference between the mortgage balance and the current market value of the home, as estimated by a licensed appraiser or by actual sale ."

1. Sell - you both agree to end the mortgage contract and simply sell the house and pay off the lender, plus any transaction costs such as a mortgage payout penalty and/or Realtor fees. Any leftover cash (the 'net equity') can be split as agreed. This does not require a mortgage broker.
2. One stays, one goes, no cash required - the party who is to leave the home requests a "release of covenant" from the mortgage lender. The one to stay is said to "assume the mortgage" and must re-qualify to carry the mortgage solely on their own financial credentials, while the other is released. There is no cash available from this process, so the parties must have enough cash elsewhere to settle their affairs. There may be a lender processing fee of a few hundred and a legal expense of perhaps $1000. Generally, no appraisal is required by the lender. Release of Covenant does not require a mortgage broker.
3. One stays, one goes, cash is required - in the event that there is equity in the home and some of the equity is required for settlement with the other party, the party to stay may be able to refinance the mortgage in their own name to as much as 95% of the appraised value or the home in order to buy out their partner. This releases the other party from mortgage and hopefully releases enough cash for settling affairs. Note, the party to stay cannot get cash out for their own personal use/personal debts. (Tip - there is no requirement to split the equity 50-50). The party to stay must be able to qualify for a mortgage on their own. Feel free to take our mortgage pre-qualification questionnaire.
4. No Equity, Can't Sell or Refinance - sad to say, but it happens. This is called negative equity and the only ways to get out of this deal (if you can't write a cheque to the bank for the shortfall) is to keep it until there is enough equity to sell.  If the parties can agree, my favourite suggestion here would be to lease the property at fair market rent to a tenant. An independent property manager can be used, and the rent payments cover the mortgage, property taxes, and insurance. A joint venture agreement covers off the details between the two parties. As the parties now have rental income to offset the property expenses, the negative effect on future mortgage borrowing is greatly reduced. We can consult on this option and perhaps help set it up for a small fee or other consideration. Contact us.

Let's Look at the Divorce Mortgage Refinance (option 3) in More Detail

In Canada, we have a mortgage program that permits one party to buyout the other with as little as a 5% equity requirement. This means, for example, if there is 15% equity in the home, 10% can be extracted to pay out or settle the joint debts and obligations of the relationship.

"Equity is the difference between the mortgage balance and the current market value of the home as determined by a licensed appraiser."

• The program applies to a mortgage held jointly with your spouse or any immediate family member (brother, sister, parent, etc.)
• Requires an Offer to Purchase, a Separation Agreement, and an Appraisal (to be ordered by your mortgage professional)
• Home must remain owner-occupied by one of you (cannot become a rental)
• Person to remain on title and mortgage must still be able to qualify to carry the mortgage in their own name (which means enough income and a good credit rating).

Example:

• Mike and Mary own a home with a current market value of $450,000 and a mortgage balance of $375,000, so there is $75K of equity, which they have agreed to split (per separation agreement) 50/50 or $37.5K each
• Mary wants to stay in the home with the kids, who are still in nearby school, and Mike agrees.
• Mike and Mary have $30K in joint debts to be paid before these joint accounts can be closed (per separation agreement)
• Mike and Mary agree to "sell" the home to just Mary for $450K, and a purchase agreement is drawn up by a lawyer.
• The new mortgage available under this program is for $427,500 (95% of the purchase price)
• Mary will provide $22,500 (5% equity/down payment) from her $37.5K share of the $75K in joint equity.
• After Mary's down payment, this will leave her with $15K and Mike with $37.5K.
• The joint debts are $30K, so they both chip in $15K and the joint accounts are then paid and closed.
• Mary is left with the home, title and mortgage in her own name and no joint debts with her ex-
• Mike is left with no more joint debts, no mortgage, and $22.5K cash, which he can then go use as a down payment to purchase his next home.
   

Next Steps for Getting Out of a Joint Mortgage

First of all, don't do anything that will screw up your credit rating.  There is an old saying about not Cutting Off Your Nose to Spite Your Face, which is worth reviewing.

Second, have a quick read on our Blog Article Keeping the House

Finally, talk to a mortgage professional well in advance and make sure you don't make any mistakes. 

It takes about 10 minutes for me to understand your situation and generate your options.

Often, upon request and when emotions are running high, I will agree to talk with both parties separately (on the phone) and help each of you understand how to navigate the storm without sinking.

Please feel free to contact me for more info. Read here to see can you mortgage qualify.