What happens with the mortgage?
If you have financed a home with a sibling, partner or spouse, common law or married and have decided to part ways, read on. Based on my experience, the most stressful issue in a relationship breakdown is what to do about the jointly owned home and mortgage. Over the years I have helped many borrowers navigate their way through this process and for some it meant one of them could keep the home while for others, it was best that the home be sold and all parties move on to new adventures. If you find yourself in this situation, I will strongly advise this is one of those times when you MUST consult an experienced knowledgeable mortgage professional for advice and direction. I say this because I personally have spoken with a number of recently separating partners who were told there was insufficient equity in the home for one partner to “buy out” the other and keep the home. These people were working with individuals who were not aware of this fairly new financing solution which allows one partner to refinance the home up to 95% of the current value as they thought one could only refinance up to 80% of the value because technically you cannot purchase a property you already own.
In order to be eligible for this program (apart from normal qualifying guidelines) you must provide a legal separation agreement which refers to the division of the equity as well as a purchase agreement where the equity is being “gifted” to one partner from the other.
Now that you have determined what you have to work with, ensure you are doing all of the right things with your finances during this difficult emotional time. Given you have made the decision to separate, be sure to keep your credit in check with no missed or late payments that could negatively affect your credit score. If you are both bringing income into the household, make sure you are both aware of who pays what payments.
Before you can agree on how to split up the assets and debts accumulated during the relationship, start with determining the value of the home which would most likely be the largest asset and largest debt. This can be done with the help of a realtor or an appraiser. Once you have the value on hand, subtract the balance owing on the mortgage and you now have the amount of “equity” in your home. Depending on how you both decide to proceed with the property, there may be other costs involved that should be considered when determining the “net equity” in your home. These costs may be realtor fees, payout penalties or joint debts that you’ve agreed to pay off.
Whether one of you is going to keep the property or you have decided to sell, there is some more information you should be aware of that should factor into your decisions:
- If you do decide to sell the home to pay off the related mortgage, the current real estate market conditions determines your selling price and if you need to sell in a hurry, you may not get as much for the home as you originally expected. Ensure you leave a bit of wiggle room in case you can’t sell for as much as you’d like.
- If one party refinances the home under their own name, thereby removing the other borrower from the mortgage and title, the individual keeping the home must qualify to carry the mortgage debt on their own. Good idea to speak to the mortgage professional sooner than later to determine if this option is even available before you get into negotiations involving the lawyer.
- The third and probably least favourable option is keeping both parties on the title and the mortgage with one person moving out. In this scenario, BOTH parties will have to declare 100% of the mortgage payment and other house related costs on any and all applications for future borrowings regardless of whether you live or don’t live in the home.
If you’re just doing some preliminary research for now, again, do make it a priority to contact your favourite mortgage professional as it doesn’t take long to run some numbers in order to determine if a certain scenario is do-able for you before you start the separation process.
These points should just act as a conversation starter with your mortgage professional. Your situation is unique, and so is your solution. It’s important to have an individualized consultation about your specific financial needs in order to determine an effective plan of action.