Mortgage and Divorce

Two of the most legally binding documents that you will sign in your life are your marriage certificate and your home property agreement. Unfortunately, when you want out of the former, the latter tends to follow suit.

The sad reality of the fact is that there are over 70,000 divorces in Canada every year [1]. A 2010 report stated that 4 in 10 first marriages end in divorce [2]. Whether or not you like statistics, it’s difficult to hide from the fact that it’s a possibility – even with the best of marriages. So here are a few mortgage options and pointers to keep in mind when it comes to crunch time.

If you are legally married, then you continue to be so until the court recognizes otherwise. So, without another legal document stating that you are separated or divorced, you are still technically married and this means that you need your spouse’s permission if you wish to buy another property or sell the current one. Welcome to family and property law.

A divorce is an emotionally trying time for everyone involved. The paperwork behind it can be just as frustrating. Keeping track of your finances is essential during a time like this. Remember that you can seek help if necessary.

A qualified mortgage professional can help you get your financing in order. There are numerous questions that need to be resolved. Is the property being sold? Will one party be able to refinance the house to buy out the other person? To avoid dragging out a long and messy divorce, ensure that you get your home financing resolved as soon as possible. Disputes over the home are one of the main causes for the delays in finalizing a divorce.

There are some options to consider:

1. Retain the original mortgage: This is the option that most people unknowingly take after a divorce; however, it is probably the most undesirable. This is when one person decides to keep the house but both names are still on the mortgage after the divorce. If your former spouse doesn`t make the mortgage payments, it can damage your credit if he/she defaults on the loan.

2. Sell the house: More on this later.

3. One spouse keeps the home and refinances the mortgage: In this case, the spouse who wants the house buys out the other spouse`s equity share and refinances the mortgage in his or her own name only.  If you go ahead with this option, you should have your spouse sign a quit claim deed to relinquish any rights that he has to the home.  If you are the person to relinquish your share in the mortgage and your name is still on the deed, you are liable for payment if your ex defaults on the loan. It is important to protect yourself from this undesirable situation.

In addition, you could have your spouse sign a Deed of Trust to Secure Assumption.  This document gives you the right to foreclose and allows you to take back ownership of the house if he/she doesn`t refinance and as a result, defaults on the mortgage. After the divorce if finalized, you should inform your mortgage lender of your security interest and request notification at your current address in the case of missed payments.

4. One spouse keeps the home and assumes the mortgage: In this case, one person takes on the entire mortgage. Not all mortgage loans are assumable so you will have to confirm this with your lender. If your lender will let you assume the loan, the process can be initiated by filling out an assumption agreement and a release of liability for your spouse. You will also have to provide documentation that demonstrates that you can pay the mortgage based solely on your own income. If you meet the requirements, you may also need to supply a copy of your divorce decree and the quit claim deed. There are a few assumption fees involved, but this can be less costly than refinancing a mortgage.

One of the most important things to consider when leaving a marriage is to maintain a healthy credit score. This will ensure financial independence and give you a good start to approaching home ownership solo.

If you both decide to sell the house, here are some points to consider [3]:

1. The property value of your home: this asset will in all likelihood be split between you and your spouse. However, the formula for this division is set out by the courts.

2. Penalties: contact your lender and find out what the penalty is for ending the contract early. To get a new contract without your spouse on the title, you will have to redo the contract.

3. Real Estate fees: how much will it cost you to sell the house and potentially buy a new property? Remember to include lawyer fees and closing costs.

4. Pre-approval: You will have to pre-qualify again for a new mortgage. This will take into consideration your income and how much you can afford. (Note: if you are getting alimony or child support, most lenders want to see three months of payments deposited to your account before considering your application.) Use our mortgage affordability calculator to get a realistic idea of the home loan that you can afford.