Undoubtedly, going through a separation or divorce is one of the most financially and emotionally challenging moments you may face. No one goes into a marriage or a home purchase with the idea that they may one day need to clinically separate the life they just spent so much time weaving together, however, for 38% of married couples in Canada this is an unfortunate reality. The process of separating finances and sorting out who keeps the house can be one of the most daunting tasks during this time period and does come with a particular level of stress and challenges. Everyone's situation is different, and obtaining a mortgage again after or during a divorce can be impacted by a million factors. I thought I would take some time here to outline a few of the options and areas which may help you separate the home, or settle into a new one. Of course, options identified below are for mortgage purposes and should always be discussed with your lawyer to ensure you are on the right path.
Keeping or Selling
The decision to keep the home or sell it is very much case by case. Typically in a divorce there is one person who wants to keep the family home. If that person does not qualify to take over the home there may be no option but to sell, however, there are a few different routes to explore to try to make that work.
Option 1 - Remove Ex from mortgage and title. If you qualify to carry the debt as it currently stands then this is by far the easiest route to go down. You can usually do this with your existing lender, or you can transfer to a new one and you usually have the option of adding a co-signer to the file as well if they are required. In this scenario you would be keeping your existing mortgage parameters exactly the same, remaining amortization, amount borrowed etc. You will want to note that in this option you will not be taking any money out of the property so if there was any financial settlement to be made or payout to your ex you would need to do that from savings or other money.
Option 2 - Refinancing. This process allows us to entirely restructure the mortgage on the property. You can pull money out to pay out the ex, push the amortization back to 25 or 30 years to get the payment as low as possible, remove the ex from the mortgage and title, add a new partner or co-signer to the mortgage, change the lender/mortgage product/payment frequency etc. During a refinance you need to retain a certain amount of equity stake in the property, typically 20% (unique properties may require a higher amount) meaning you can borrow back up to 80% of the homes appraised value. For example, if the house is worth $400,000 and you currently owe 200,000 you would be able to borrow up to 320,000 against the home. You could then pay off the old mortgage and take up to 120,000 back out of the property to pay out the ex or pay off debts. The new mortgage would then be registered for 320,000. Of course, you will need to be able to debt service the loan amount, but this is a great way to clear up a divorce while being able to customize your mortgage payments to suit your needs at this time. Most people opt to reduce the monthly payment by as much as possible so they can get their feet back under them financially before choosing to start paying down the mortgage faster perhaps 5 years down the road.
Option 3 - Spousal Buy-Out. If you don't have the required equity stake in the house in order to refinance, or if you need to pay out the ex more than is available under a typical refinance or if you don't qualify to take over the existing mortgage as it is we do have a third option where you can purchase the house in your name from your ex. A spousal buy-out purchase is essentially starting over. The existing equity is deemed as your down payment, the purchase price is set at market value and you may need to re-pay any CMHC insurer premiums again, but you can under this transaction borrow back up to 95% of the market value of the house. You can bring a co-signer on or a new partner to help you with debt servicing as well. This is the most costly route to go down as it does typically involve paying those insurer premiums again, but it is an option when the other routes are not available.
Qualifying There are a ton of factors that will contribute to your ability to qualify for a mortgage during a divorce. The divorce or separation agreement. We do need to have one of these signed agreements in place in order to move forward with any title changes etc. The agreement outlines any spousal support or child support payments, the ages of children (if applicable), who is getting the house, if there is a payout amount to be done from the house etc. Often the final signed agreement may be subject to you obtaining financing to take over the property, in those instances we can submit the file to a lender and have confirmation that they will lend to you pending the receipt of the signed document so there can sometimes be a balancing act with timing the application and divorce signing. Typically we can hold an approval for up to 4 months while waiting for the agreement to be finalized.
Support payments
Spousal support and child support payments need to be taken into consideration when qualifying. If you are on the paying side of the support payments we do need to account for these in your debt servicing ratios which will reduce the maximum mortgage size that you will qualify for. If you are on the receiving side, we can use these towards your annual income which will help with debt servicing. We can also look at using Child Care Benefit as well, however, once we get into using these types of income there are limited lender options so we may need to play Tetris to fit all of the parts together with the right lender. It is possible to be approved if you are a stay at home parent with only support payments as income but this is on a case by case basis and depends greatly on how long the payments will be in effect for. Ages of the children will also affect the use of child support or CCB income as the lender won't want to be using child support income for a child that is older who will age out of the support payments soon. RRSP Withdrawal For the first property you purchase after a divorce you do once again qualify for the First Time Home Buyers Plan RRSP withdrawal scheme. Under this plan, you can withdraw RRSP savings to be used as down payment on a home without needing to pay tax on that withdrawal in the current year. You then have 15 years to repay the amount, if you don't re-contribute 1/15th towards the RRSP each year you will be taxed on the 1/15th amount for that year. First Time Home Buyers Incentive For the first property you purchase after a divorce you also qualify as a first time buyer again for the purposes of the new FTHBI which was rolled out in fall of 2019. Under this program, the government will 'top-up' your down payment on a purchase with an interest free loan in exchange for an equity stake in the property which is repayable upon selling the home, or after 25 years. For more information about this program check out my blog post explaining all about this item called "First Time Home Buyer Incentive - What is all the fuss about?". Moving on Moving on both figuratively and physically is always easier said than done. Seeking the right resources to help you through this time is paramount to relieving stress on yourself and your family. Lawyers, counselling services, Realtors and of course, a good Mortgage Broker will all work for you to make sure you are set up for success to get back to making your house a home. As always, if you have any questions, feel free to reach out to me at 780-720-4034