Divorce and spousal mortgage buyouts happen more than you’d think. Out of 87 countries, Canada has the 29th highest divorce rate as one in every 309 adults is divorced. Getting a divorce is difficult and even harder when you have a joint mortgage.
There are different options to choose from to overcome a joint mortgage. If you want to stay in your current home, you’ll have to buy out your partner.
Read on to learn about spousal mortgage buyout and other options for Canadian homeowners going through a divorce.
Before getting a divorce, two people will come to an understanding through the separation or divorce process. Each partner agrees on a written custody arrangement for children, spousal support, and asset division.
Financial obligations that have to do with the home and mortgage are uncovered through the Separation Agreement. This is required at a minimum to be considered legally separated for both married couples and common-law couples.
This process runs smoother if both partners cooperate and understand the required steps. Without cooperation, you may have to get a lawyer involved and go to court, the more expensive option.
In some cases, a marital dispute can lead to one partner dragging the other into bankruptcy. This is the worst-case scenario, but it does happen.
Divorce and Spousal Mortgage Buyout – The Matrimonial Home
Mortgages are financial obligations by both partners in a matrimonial home. A mortgage lender requires the parties involved to deal with their mortgage before seeking out another property on their own.
If your name is on the mortgage, you are financially liable to pay off the debt. Whether or not you occupy the property does not matter.
Having one unpaid mortgage will affect your ability to gain another in the future. Even if one partner stays in the home and agrees to pay the mortgage, you are financially liable if they default and your name remains on the contract.
Without laying out the new financial obligations in the Separation Agreement, lenders won’t give you the time of day. Some lenders will ask for bank statements to ensure they’ll receive reliable payments as per the Separation Agreement.
Ways to Get Out of a Joint Mortgage
There are a few ways one or both spouses can get out of a joint mortgage. Whatever option you choose should be stated in the Separation Agreement.
Selling the Matrimonial Home
Selling may be the best way to increase financial stability after a divorce. This option involves both parties deciding to sell their home to end their mortgage contract.
The parties will have to pay off the lender and cover transaction costs. You don’t need a mortgage broker when you opt for this method. The net equity, if there is any, is split between the two parties however they agree.
Requalify to Carry the Loan by Yourself
If one spouse stays and the other one goes, the one who stays must requalify to carry the mortgage with their sole financial credentials. The party that leaves asks for a “release of covenant” from the lender.
This is not a buyout, so there is no cash available to either party. Both must have enough cash stashed somewhere else to support themselves further. The lender may charge a processing fee and legal expenses.
Leasing the Property
This is not the most attractive option as it usually happens when there is no equity in the home. This means there is no way to sell or refinance.
The only way to get out of a mortgage, in this case, is to leave it until the equity builds up. Leasing the property is a great option if both parties can agree. If not, you’ll both be stuck paying payments whether you live together in the property or not.
If there is equity in the home and some cash is necessary to settle with the other party, the party that stays can refinance the home. During the mortgage refinance process, a mortgage can get financed up to 95% of the appraised value.
Many lenders offer this type of spousal buyout program. This is then used to buy out the other partner and they are released from the mortgage. The staying party cannot get cash out from this deal and there is no requirement for both parties to split the equity.
Divorce Mortgage Refinance Details
A spousal buyout is one of the more popular options among homeowners in Canada. This method always requires mortgage refinancing.
The mortgage program in Canada allows one party to buy out the other with at least 5% equity. This program only applies to a joint mortgage with your spouse.
The program requires a Separation Agreement, an Offer to Purchase, and an appraisal through a mortgage professional. The home cannot become a rental as it must be occupied by one of the parties on the mortgage.
The person on the title and mortgage has to be able to carry the mortgage on their own to qualify for this program. This is a general requirement throughout the buy-out process.
You’ll have to purchase the other party’s part of the loan and requalify for it with their own assets. You can determine how you want the mortgage split from here, it does not have to be 50/50.
To prove you can carry the mortgage on your own, you must have a good credit rating and show proof of enough income.
Dealing With a Divorce?
Dealing with a divorce is difficult as is, but when you are both named on the mortgage, separating can become even harder. There are different options to choose from to get out of the mortgage or buy out the other party.
When you decide on the method that is right for you, it must be stated in a Separation Agreement. To ensure you don’t make any mistakes during the process, speak to a mortgage professional who can easily understand your situation.
Contact us today at 1-877-383-1577 or apply online and we will get working on a solution for you.