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Separation MortgagesUnfortunately, not all marriages and common-law relationships work out in the end.
It's common that when a couple decides to separate, they are anxious to move on with their lives. If you are planning on getting a mortgage to purchase a home post separation, whether it be taking over the marital home or purchasing a different one, you'll need a fully executed separation agreement before a Lender will approve you for a mortgage. Completing the separation agreement can be a tedious process that often takes a long time, so some patience will be required. Here are a few things to keep in mind: |
The Separation Agreement
Mortgage Lenders require (in most cases) a complete, legal, fully executed separation agreement when applying for a mortgage in order to know what your financial situation will look like after you've separated.
If you'll be paying or receiving child or spousal support, that needs to be included in the mortgage application and will affect the amount of mortgage you'll qualify for...either positively or negatively, depending on whether you're paying or receiving the funds.
From a mortgage qualifying perspective, there are a few parts to the separation agreement that are most important:
Of course, it's important that the entire separation agreement is prepared properly in order to protect both parties. The above information just outlines the main sections of a common separation agreement that mortgage lenders pay closer attention to as it can affects the affordability of the mortgage.
If you'll be paying or receiving child or spousal support, that needs to be included in the mortgage application and will affect the amount of mortgage you'll qualify for...either positively or negatively, depending on whether you're paying or receiving the funds.
From a mortgage qualifying perspective, there are a few parts to the separation agreement that are most important:
- Child Support - The separation agreement needs to clearly document the amount of child support paid by each person and on which day of the month. *Note-when applying for a mortgage post-separation, the person collecting child support may be able to use the support as additional income on their application, therefore, allowing them to qualify for a larger mortgage amount if necessary. However, it's very important that the child support payments being received are the exact amount as documented in the separation agreement and on the date outlined in the agreement as well.*
- Spousal Support - The separation agreement needs to clearly document the amount of spousal support being paid by each person. Just like child support, the spousal support may be used as additional income on the mortgage application, however, the amount and date must match whatever is documented in the separation agreement.
- Debts and Obligations - This section outlines what will happen to the debts that currently exist once the separation is complete. This is important for the Lender as it will affect the mortgage approval amount
- Division of Family Property - When someone applies for a mortgage, a net worth statement is submitted as part of the mortgage application. This shows the Lender the applicants assets compared to their liabilities. Although the division of property won't affect the income or debt section of the application, the list of assets, post-separation, will be required for the net worth section.
- Equalization - This section documents a dollar amount that one person owes to the other person to "make things fair." Basically, the total value of each person's portion of the family owned assets are determined. The person who is receiving the larger value, will be required to pay the other person the difference. For example, person A's assets total $50,000 and person B's assets are worth $35,000. Person A will pay person B $15,000 as an equalization payment. This is just a basic explanation. The actual process can involve negotiations.
Of course, it's important that the entire separation agreement is prepared properly in order to protect both parties. The above information just outlines the main sections of a common separation agreement that mortgage lenders pay closer attention to as it can affects the affordability of the mortgage.
The Marital Home
If you and your ex own a home together, you'll need to decide what to do with it.
Will you sell it and split the proceeds or will one person remain living in it and buy the other person out?
If you sell it, you'll need to agree on how much of the net proceeds each party will get, and document that in the separation agreement. It's common for separating couples to use the proceeds to pay off any joint debt and then split the remaining funds if there are any.
You may agree that one person will stay in the home. If this is the case, there are two common outcomes;
If you're keeping the home, you don't owe your ex any money, and you don't need to access any of the equity out of the home for your own use, you would just work with your current Mortgage Lender directly to have your ex removed from the mortgage. You would apply to take over the mortgage just in your name, and you will need to qualify to carry the mortgage on your own.
If you're keeping the home, you do owe your ex some money, and want to access some of the homes equity for the pay out, then you can apply to refinance the home.
Refinancing is the process of replacing the existing mortgage with a larger mortgage and withdrawing the difference in cash (which you can use for the payout or anything else you want).
Normally when someone refinances a home, they can only do so up to 80% of the home's appraised value.
When there is a relationship breakdown, it may be possible to withdraw up to 95% of appraised value, if the funds are needed to satisfy financial obligations which are documented in the separation agreement. In this type of situation, it wouldn't be considered a refinance. This would be a High-Ratio Spousal Buyout where one person is actually buying the home from the other person. An offer to purchase document will need to be drafted by a lawyer for this and an appraisal will also be needed to officially determine the current market value of the home.
In all cases, the person keeping the home will need to qualify for the mortgage on their own, whether they are just taking over the existing mortgage, refinancing the property, or purchasing it from their ex.
Will you sell it and split the proceeds or will one person remain living in it and buy the other person out?
If you sell it, you'll need to agree on how much of the net proceeds each party will get, and document that in the separation agreement. It's common for separating couples to use the proceeds to pay off any joint debt and then split the remaining funds if there are any.
You may agree that one person will stay in the home. If this is the case, there are two common outcomes;
- The person takes over the mortgage and the other goes their own way with no exchange of funds related to the home.
- The person staying in the home agrees to buy the other person out of the home...meaning they agree to pay the other person a lump sum of money for the right to keep the home for themselves.
If you're keeping the home, you don't owe your ex any money, and you don't need to access any of the equity out of the home for your own use, you would just work with your current Mortgage Lender directly to have your ex removed from the mortgage. You would apply to take over the mortgage just in your name, and you will need to qualify to carry the mortgage on your own.
If you're keeping the home, you do owe your ex some money, and want to access some of the homes equity for the pay out, then you can apply to refinance the home.
Refinancing is the process of replacing the existing mortgage with a larger mortgage and withdrawing the difference in cash (which you can use for the payout or anything else you want).
Normally when someone refinances a home, they can only do so up to 80% of the home's appraised value.
When there is a relationship breakdown, it may be possible to withdraw up to 95% of appraised value, if the funds are needed to satisfy financial obligations which are documented in the separation agreement. In this type of situation, it wouldn't be considered a refinance. This would be a High-Ratio Spousal Buyout where one person is actually buying the home from the other person. An offer to purchase document will need to be drafted by a lawyer for this and an appraisal will also be needed to officially determine the current market value of the home.
In all cases, the person keeping the home will need to qualify for the mortgage on their own, whether they are just taking over the existing mortgage, refinancing the property, or purchasing it from their ex.
Payout / Settlement / Equalization
Once the separation has been finalized between both parties, if one person is required to pay a lump sum of money to the other and that person will be using those funds for their down payment and closing costs to purchase their next home, it's very important that the person buying the house (receiving the payout) waits until they have the funds in their account from their ex before proceeding with the purchase of a home.
Sometimes separations get ugly and one person tries to make life difficult for the other.
When you purchase a home, you need to prove that you have the necessary funds available to complete your transaction (down payment and closing costs).
If you are counting on the funds from the equalization payment for this purpose, and your ex decides not to pay you on time, you're in trouble if you don't have another source of funds to fall back on.
Sometimes separations get ugly and one person tries to make life difficult for the other.
When you purchase a home, you need to prove that you have the necessary funds available to complete your transaction (down payment and closing costs).
If you are counting on the funds from the equalization payment for this purpose, and your ex decides not to pay you on time, you're in trouble if you don't have another source of funds to fall back on.
Mind Your Credit
Separations can take a long time to sort out.
Keep an eye on your credit while you're working through the process.
Make sure all your payments are still being made on time and your credit remains strong.
It's common for couples to have joint debts, but one person has always been in charge of making the payments.
For example, both names are on the car loan, the car is considered to be one person's car, but the other person makes the payment from their personal bank account each month. When you're in the relationship, it's fine because you handle finances as a team.
But sometimes separations get messy, people are hurt and emotions run wild. One person (using the above example) may feel the need to seek revenge by stopping the car payments without telling the other person.
Even though these types of things will severely damage both of your credit ratings, and make everything finance related more difficult for the foreseeable future, people still do them.
Pay close attention to your credit.
P.S. NEVER MISS A MORTGAGE PAYMENT! If a mortgage payment is missed, the chances of qualifying for another mortgage is very slim for a very long time.
Keep an eye on your credit while you're working through the process.
Make sure all your payments are still being made on time and your credit remains strong.
It's common for couples to have joint debts, but one person has always been in charge of making the payments.
For example, both names are on the car loan, the car is considered to be one person's car, but the other person makes the payment from their personal bank account each month. When you're in the relationship, it's fine because you handle finances as a team.
But sometimes separations get messy, people are hurt and emotions run wild. One person (using the above example) may feel the need to seek revenge by stopping the car payments without telling the other person.
Even though these types of things will severely damage both of your credit ratings, and make everything finance related more difficult for the foreseeable future, people still do them.
Pay close attention to your credit.
P.S. NEVER MISS A MORTGAGE PAYMENT! If a mortgage payment is missed, the chances of qualifying for another mortgage is very slim for a very long time.
Summary
The breakdown of a relationship can be very complex as there are many details to consider. This is why the separation process can take a long time.
Even though it can be stressful and exhausting, taking the time to do things right will pay off in the end as you'll be able to move forward in a good position.
If you're thinking about separating or have already made the decision, and you want to purchase a home, call me early in the process so that I can help you set things up with your lawyer so that you'll be able to qualify for a mortgage easily when the time comes.
**IMPORTANT** - The information on this page should not be considered legal or financial advice. Please refer to a Lawyer, Accountant, and Certified Financial Planner for their advice on related matters.
The breakdown of a relationship can be very complex as there are many details to consider. This is why the separation process can take a long time.
Even though it can be stressful and exhausting, taking the time to do things right will pay off in the end as you'll be able to move forward in a good position.
If you're thinking about separating or have already made the decision, and you want to purchase a home, call me early in the process so that I can help you set things up with your lawyer so that you'll be able to qualify for a mortgage easily when the time comes.
**IMPORTANT** - The information on this page should not be considered legal or financial advice. Please refer to a Lawyer, Accountant, and Certified Financial Planner for their advice on related matters.
