In our day and age, divorce and separation is an inevitable occurrence that affects us all. We have all known someone directly, or have been that someone, who has experienced a divorce. It can be a very stressful and messy time, but it doesn’t have to be overwhelming. Knowing your options when it comes to dealing with your home, and it’s existing mortgage, will alleviate large concerns.
When you go through a divorce, your assets and finances get distributed according to your separation agreement or court order. Usually, people’s largest asset is their home and any other properties owned within the marriage or partnership. If you find yourself holding a mortgage on the property(ies) you own during a divorce or separation, rest assured you have options.
An assumable mortgage is one that can be transferred without changing the terms of the original mortgage. One partner can assume the current mortgage if the mortgage loan is assumable and both agree and sign an assumption agreement. It is best to check with your mortgage broker to find out further details and processes for assuming the mortgage. If the mortgage is assumable, this can be a cheaper alternative to refinancing.
Canada Mortgage and Housing Corporation (CMHC) recently changed the guidelines on refinancing; now, homeowners are only allowed to refinance up to 80% of their home’s value. However, what most people are not aware of is that in circumstances of separation or divorce, CMHC will allow you to refinance up to 95% of your home’s value. In this case it allows one partner to buy the home back from the other partner with only 5% down. The partner keeping the home can, therefore, pays the share of equity owed to their partner and refinances the home in their name only.
If one person keeps possession of the home while both partner’s names are on the mortgage and any payments are missed it can damage both individuals’ credit scores.
Most commonly, when people go through a separation or divorce they decide to sell the partnership home. The equity in the home will then be distributed between both partners as set out in a separation agreement or by the courts. When you are considering selling the home, consider any penalties that may arise from eliminating your contract early and redoing a new one on your own. Also, it is important to remember that child and spousal support payments that are paid, count as an expense; likewise, child and spousal support payments that are received, count as income. This may affect your ability to get approved for another mortgage on your own.
Going through a separation or divorce can be very costly. It’s often a good time to draw on the equity in your property, consolidate other debts, and be realistic about what you can afford in a new mortgage. Contact AC Lending for expert advice on how to manage your mortgage through a separation or divorce.