Until death do us part isn’t always the way marriages end, and that’s OK. It’s common for couples pursuing divorce or separation to stop living together, and it’s also common for the home to be the biggest asset they own.
Chances are, if you’re separating from your spouse, you’re going to want to find a new home and apply for a new mortgage, but you won’t be able to do that until you’re able to get out of your current joint mortgage.
In this article we’ll talk about what your options are when dealing with your mortgage through a divorce and how to move forward in the right direction.
Handling Your Mortgage During A Divorce
Separating Or Divorcing
When married couples are going through the process to become legally separated, they will be working on creating a written separation agreement that outlines a custody arrangement for any children, child support, spousal support and the division of assets and debts, often including the home and mortgage. To be more specific, a separation agreement deals with how the financial obligations of both parties will be split, while divorce (if the parties have been legally married) simply means the marriage is legally ended, and both parties are free to remarry. The separation agreement always comes first.
Determine The Value Of Your Home
Before you decide what to do with your property and how you’re going to divide the mortgage, you should first determine the value of your home. Chances are, your house is your largest asset and carries with it most of your debt, which can make it tricky to divide up. If you’re not sure of the accurate market value, consider using a REALTOR® or hiring an appraiser to learn more about how much it’s worth. Once you have the confirmed value, subtract the outstanding balance owed on the mortgage to get the current value or amount of equity you actually have in the home. Keep in mind that you and your spouse remain fully responsible for the mortgage unless you sell the property or choose to refinance. If neither of those sounds plausible, be sure to thoroughly explore your options as you’ll be limited with what you can do above and beyond that.
Options Available During A Divorce
Sell Your Home
The easiest way to deal with splitting a mortgage is to sell the house. The divorced couple can sell the property, pay off the mortgage and move on separately. This will avoid any accumulated interest charges. If things are looking rocky in your relationship, make sure you give yourself enough time to list and sell the house for the amount you want instead of waiting until the last minute and losing out on money because of your short timeline to sell. Any cash left over after the sale (net equity) will be split between the spouses as outlined in the separation agreement. This is a simple solution that you won’t need a mortgage broker to assist with.
Refinance
Choosing to refinance the mortgage under the name of one spouse is a convenient but costly solution. Refinancing your mortgage means you’ll have legal and appraisal fees to pay and possibly even a discharge fee from your current lender. Be aware that the costs can add up quickly, so do your homework in terms of what you’ll need to pay and how the process works to make sure you don’t lose out on any value. It’s important to note that this option may not always be well suited for everyone as the applicant will have to meet specific qualification criteria so be sure to put some time in to learn more and compare mortgage rates.
Keep House With Both Partners On The Mortgage
While this is definitely a possibility, it’s usually a last resort. If you and your spouse simply can’t come to an agreement about dividing up the value of the home, there is the option to keep it with both of your names on the mortgage while one person moves out. The couple will both have to fully declare the mortgage payments and other house related costs on any future loans or credit applications which could prevent them from receiving another mortgage.
Buy Out Your Partner
If there’s equity in the home and some of this is required to settle with the other party, the party who would like to stay in the home may be able to refinance the mortgage in their own name to as much as 95% of the home’s appraised value so they can successfully buy out the other party. A buyout would release the party who is leaving from the mortgage and ideally, release sufficient funds for the other party to settle their affairs so each person can move on with a clean slate.
Release Of Covenant From Mortgage Lender
In this scenario, the spouse who chooses to leave the home would request a release of covenant from the mortgage lender, which will allow them to remove their name from the mortgage. That being said, the party who remains in the house will be assuming the mortgage and will be required to requalify on their own. There’s no exchange of cash in this scenario so all parties must have sufficient funds on hand to settle their affairs accordingly.
Negative Equity On Home
Unfortunately, this is a reality for some couples. Negative equity means that the only way to get out of the mortgage eventually (if you simply can’t write a cheque to the bank for the downfall) is to keep it until enough equity builds up for you to sell. If both parties can’t agree to this, leasing the property is also an option. An independent property manager can be brought in and a joint venture agreement would cover all the details between the two parties.
Actions To Take Before Applying For A New Mortgage After Divorce
Close Joint Bank Accounts
If your spouse has opened any bank accounts in your name, make sure you close these so you aren’t held responsible for any missed payments on the accounts. As soon as you close an account, your credit score will take an immediate hit so plan to open a new account right afterward to avoid any big pitfalls.
Close Joint Credit Cards
The same logic for bank accounts applies to credit cards. When used correctly and responsibly, credit cards are a great way to build credit and improve your credit score. When you close joint accounts and open new ones, be sure not to reapply for more than one or two, as applying for too many at once can send too many inquiries on your credit report which will scare lenders and lower your credit score. Do your research and make sure you’re only applying for cards you’ll definitely get approved for so you don’t risk lowering your credit score in the process.
Organize Your Financial Commitments
Managing financial commitments with only one income can be a lot more difficult than it seems if you’re used to relying on two incomes. Make credit card payments and payments toward debt (student loans, car loans etc.) a priority as much as you can.
Even though you may be going through a tough time, it’s still very important to stay on top of your finances. Learn more about refinancing after a divorce to see if it’s the right fit for you and take the time to better understand mortgage renewals so you know how the process will work. Keep an eye on your credit score, ensure you continue to make payments on time and practice fiscal responsibility. These simple steps will help get you access to the best possible options so when it comes time to divide the mortgage, you can enjoy a smooth transition into the next phase of your life.
Remember, if you have any specific legal questions about your separation or divorce you should consult a divorce lawyer. If you have any specific questions related to your mortgage you should speak with your lender, mortgage agent or financial specialist. Contact us to start the conversation.