The path of life is filled with many unexpected twists and turns, and we have wills, power of attorneys, and medical derivatives available for some of these unexpected eventualities. In the event that we have to confront the unexpected by way of splitting up with a partner, we have to deal with the messy task of sorting through all of our assets. And when this happens, what becomes of our mortgage?
Splitting up with a partner can be one of the most trying periods of your life, and the emotional upheaval can be compounded by the logistics of dividing a major asset such as a home. Each province and territory is responsible for its own laws regarding the division of family/marital property, and these laws vary from one province or territory to another. Generally speaking, marriage is seen as an equal partnership in the eyes of the law, so for the most part, anything that has been acquired during your marriage and that you still have ownership of at the time of separation must be divided equally. The “matrimonial home” is the space where you and your spouse live primarily at the time of your separation, and regardless of whose name is on the title of the house, both parties have an equal right to the home.
But your lender doesn’t care who has a right to the home, or for that matter, who lives in the home. All they care about is getting paid. There are a number of ways to handle the mortgage in the event that you and your partner split up.
Sell your house
This is the simplest option, and it works best if neither you nor your ex-partner wants to remain in the home. You put your home on the market just like you would if you were selling it for any other reason. When it sells, you split the proceeds with your ex-partner and both find new housing. Depending on how long the home takes to sell, however, it could be uncomfortable if your parting is somewhat less than amicable and both of you have to remain in the home in the meantime. If the living situation becomes unbearable, one of you might have to explore options that include staying with a friend or a family member. The option of selling your house is the most clear-cut option since you’re not changing the mortgage itself, and once you sell the home, it’s a clean break for you both.
The downside to selling your house is that it’s costly. Between commissions, land transfer taxes, and lawyer fees, you’re going to end up out of pocket by tens of thousands of dollars. Only the two of you can decide if it’s worth the money to sell.
Request a change to the mortgage
If one of you wants to remain in the home, or you are unable to sell it for whatever reason, you and your ex-spouse can request a change to the mortgage itself, so that one of your names gets removed. If you do this, however, it’s not a free ride. The would-be solo mortgage holder now has to qualify for the remaining amount of the mortgage on his/her own, which may prove difficult, especially with only one income. You can also change the mortgage through a refinance, but if your lender is accommodating enough to change it without refinancing, then you could save a lot of time and money associated with refinancing. And if your lender does agree to remove you from mortgage, don't forget that you still have to go to a lawyer to remove you from the title of the house.
James Robinson, a mortgage agent with Dominion Lending Centres, says that although asking a lender to change the names on the mortgage sounds like a simple option, most people don’t go that route.
“Typically, it’s not that common that it happens that way. In most cases, if there’s a buyout, they have to raise more money because the person being taken off [the mortgage] has to be paid. So in that case, it would become a refinance; in either case, the person staying on the mortgage would have to qualify on their own, and with the person being removed, you lose their income as part of the qualification.”
If you can’t qualify for the mortgage, you can’t afford to keep the home, so most people would end up having to sell anyway.
Sort it out with your lawyer
The divorce is really just the official paperwork that says that the marriage is over; it’s only necessary if either party wants to eventually remarry. The separation agreement is actually more important, as it sets out all of the agreed-upon terms of the separation.
As part of your formal separation agreement, you and your ex-spouse can decide how to handle the mortgage payments if you decide not to sell your matrimonial home. One person might stay in it while the other person simply pays his/her share of the mortgage and/or housing related costs. But be careful with this option and make sure that the agreement is iron-clad; if one person stops paying their share of the mortgage, then both of you could be in trouble – not only if you go into mortgage default because the other person can’t pay the mortgage alone, but because if this happens, both of your credit histories could suffer.
“I’ve certainly seen agreements and counseled people where an agreement says that person A is going to be responsible for all the payments on the mortgage and that’s okay in terms of the separation agreement, but it doesn’t change the contract with the lender,” Robinson says. And even if you agreed in the separation agreement that your ex-partner would make the mortgage payments going forward, your lender still refers to your mortgage contract as the gospel. “The bank says, ‘No, no, until we agree to remove you from the mortgage contract, you are legally responsible.’”
Life continues after a divorce, and partners who split will often want to buy another home. But even if you sell your house and want to buy another, you have to get a signed separation agreement before you can even think about getting another mortgage. “The separation agreement, one of the things it sets out is any type of support,” Robinson explains. “So whether there’s spousal support or child support being paid or received, that’s the document that sets that out. So if you’re paying support, then that’s considered a debt, and they have to know exactly what those amounts are so that they can determine how much of a mortgage you qualify for.”
On the flip side, if you're receiving support, there are rules regarding what support can be counted as income (the ages of your children if you’re receiving child support, for example), and how much of your total income can be counted as support versus employment income. “It’s very challenging to get a mortgage for a person whose only source of income is from support,” Robinson says. For mortgage qualification purposes, only about 30-35 per cent of income should be from support and, Robinson adds, lenders like to see bank statements demonstrating that the support is actually being paid. Just like with credit histories, the longer and more stable the history of payment, the better.
Protect your credit
While some people feel very emotionally tied to the matrimonial home, other people feel that there are a lot of bad memories there – or that if they choose to remain there, a new partner won’t want to live in the home where there ex-spouse once resided. Whether you have good memories or bad, you don’t want to dwell on those when making financial decisions.
“I think what is the most important from a mortgage standpoint is to take the emotion out of it. Regardless of whether you think it’s your debt or you don’t think it’s your debt, if your name is on it, it’s your debt – regardless of who spent the money,” Robinson says. “If you have a joint car loan, and I’m getting the car but you’re still on the loan, until the bank agrees that you’re no longer responsible for the loan, you have to make sure you make those payments because you’re only hurting yourself [otherwise]. If you stop making payments then it’s going on your credit report and it’s gong prevent you in the future from borrowing money. And that’s what we see in situations where people split in a nasty separation.”
There are sitautions where lenders will look at a client’s credit history and be understanding when they see a brief period of time when a client's credit rating plunged while going through a divorce, as long as it then rebounded and remained high for a long period of time afterward. More often than not, however, it doesn’t work out that way. Because of this, Robinson says, “you really want to try not to ever miss a payment. Even if it means making a payment that you don’t believe you’re obligated to make.”
If you think you’re going to separate from your partner, it’s good to start with good advice from a mortgage professional in the early stages of the process and assess your options. Between your mortgage broker and your lawyer, you should have a solid game plan moving ahead with the separation.
“If you plan it in advance, then you have a higher possibility of success,” Robinson says.
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