Dividing the Family Home and Mortgage During Separation & Divorce
Divorce is seldom a pleasant topic. Stress is an understatement. Irrational behavior is common. If you had experience with relationship breakdowns, things might go a whole lot easier, but separation and divorce is not something one gets a lot of practice at.
As it relates to housing and mortgages, you can navigate through the mess and position yourself for a brighter future, just don't make any critical mistakes.
A quick story. From 2002 through 2006, my wife and I sold everything, bought a 40' sailboat and went on a 5 year world navigation with our two young sons. We sailed down the west coast of North and Central America, through the Panama Canal, and later crossed the Atlantic Ocean, which took us 26 days at sea to reach the Azores, and another 8 to reach Portugal.
We often get asked about storms, and yes there were storms ... monster seas, screaming wind, pitching boat, scared for our lives, and always it seemed to be at night in the dark. Worst of all, one never really knew when the storm would end; when calm would come again...
...but it always did, and we learned that.
Over time, we got good at managing storms. We were prepared, avoided making mistakes, and knew our next step.
As it relates to separation and divorce (or any relationship breakdown), this storm too shall pass. Here are your next steps to managing the mortgage through the process of separation and divorce, whether keeping the current home or getting the next.
"Storm's a comin' " - Do's and Don't's
- Understand and protect your credit rating no matter what! It is essential for your next mortgage OR to get the current mortgage in your name only. Missed payments on any debt obligation with your name on it is like putting a hole in your own boat. Pay regardless (even if your spouse's car), keep receipts, settle-up later.
- Separate your joint accounts as soon as possible. Reference your credit report (www.equifax.ca) and make sure nothing is missed. If a joint account permits "any one to sign" (vs both to sign), then you can likely close it. If the account is revolving (a credit card), then the debt will need to be paid off before you can close. Here's more detail. Keep bailing until you can get the holes plugged!
- Get your financial obligations to each other and children figured out ASAP. This is the separation agreement. Understand that no mortgage lender is going to consider a loan for you if your financial obligations to each other are yet to be determined. Understand that you have to get this behind you before the sun can come out again.
Once the separation agreement is in place, and the credit rating is intact, you will feel the storm beginning to subside. The worst is over.
How a partner can buyout the home and take over the mortgage upon divorce or dissolution of a relationship
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(s) (include any HELOC/Secured Lines of Credit) and the current market value of the home, per 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).
- 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
Thank you for reading this far.
If your head is whirling with emotions, compounded with all these numbers and details, remember you don't have to be an expert. You just have to recognize that your next best step is to talk to a mortgage professional well in advance and make sure you don't make any mistakes.
It takes about 10 minutes 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. Remember, this storm too shall pass.