If you own and live in a home with a sibling, partner or spouse, common law or married, and have decided to part ways; read on. I believe one of the most stressful issues of 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.
If you find yourself in this situation, I would strongly advise you consult with 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. Under the spousal or family buyout program, one partner can refinance the home up to 95% of the current value regardless of the 80% refinance rule, because technically you cannot purchase a property you already own.
Determine the value of the home
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, as it is most likely the largest asset and debt. This can be done with the help of a realtor for a preliminary market valuation, or, you could hire an appraiser to provide a detailed valuation analysis. 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.
Decide what to do with the property
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 will 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. 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. Before you get into negotiations involving the lawyer, it’s a good idea to speak to the mortgage professional sooner than later to determine if this option is feasible.
- The third and probably least favorable 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 they live or don’t live in the home. This could be the scenario if neither party qualifies for the mortgage on their own, nor the property cannot be sold for one reason or another. A temporary solution could be to look at renting out the joint home until there is a favorable option available for both parties.
In order to be eligible for the specialized 95% financing (apart from normal qualifying guidelines) you must provide a legal separation agreement if you have been a couple which refers to the division of the equity. You’ll also be asked to provide a purchase agreement where the equity is being “gifted” to one partner from the other. This is in addition to regular income and credit supporting documents, and perhaps an appraisal to confirm the property value.
What not to do
Ensure you are doing all of the right things with your finances during this difficult emotional time to give yourself access to the most options when it comes time to split the home. 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 makes what payments.
One size does not fit all
As each individual’s financial situation is unique, so are the solutions. These points should just act as a conversation starter as they do not replace an in-depth discussion with a qualified professional. It’s important to have a personalized consultation about your specific financial needs in order to determine an effective plan of action. There is a lot of information out there that may not be applicable to your situation so be sure you’ve explored the fine print to ensure you qualify before you commit.