|
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 but a separation can often be a tedious process that takes some time to sort out. 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, it's important to have your ducks in a row first before applying for a mortgage. Here are a few things to make note of: |
The Separation Agreement
A complete, legal, fully executed separation agreement is a must when applying for a mortgage.
Mortgage Lenders need to know what your financial situation will look like after you've separated and they need to see official, legally binding, documentation to prove it.
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 financial support.
If jointly held debts will be transferred to one person, this should be documented within the separation agreement for both party's benefit/protection. Lenders will also look for this type of information when considering a mortgage approval.
Mortgage Lenders need to know what your financial situation will look like after you've separated and they need to see official, legally binding, documentation to prove it.
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 financial support.
If jointly held debts will be transferred to one person, this should be documented within the separation agreement for both party's benefit/protection. Lenders will also look for this type of information when considering a mortgage approval.
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 assume 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 the refinance is due to a relationship breakdown, it may be possible to refinance the home up to 95% of appraised value, if the funds from the refinance will be used to complete the obligations listed in the separation agreement, such as joint debts or spousal payout. You will not be able to refinance the home up to 95% of it's value to use the money to pay off personal debts or for other personal uses.
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 or refinancing the property.
This is another reason why the separation agreement is so important.
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 assume 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 the refinance is due to a relationship breakdown, it may be possible to refinance the home up to 95% of appraised value, if the funds from the refinance will be used to complete the obligations listed in the separation agreement, such as joint debts or spousal payout. You will not be able to refinance the home up to 95% of it's value to use the money to pay off personal debts or for other personal uses.
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 or refinancing the property.
This is another reason why the separation agreement is so important.
Payout / Settlement
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, Lenders will need to see proof that the funds are available.
The standard process when applying for a mortgage is to prove that the necessary funds for down payment and closing costs are available.
We prove this by providing the Lender with a 90 day transaction history of any bank or investment accounts that will be used to fund the home purchase.
The reason we need a 90 day transaction history is to comply with anti-money-laundering regulations. These regulations were put in place to prevent illegal money being used to purchase real estate. If there are any large deposits going into any of the accounts being used for the purchase, a paper-trail must be provided to show where the deposit came from.
For example, let's say you received a lump sum payment of $30,000 from your separation. You deposited the $30K into your chequing account because you'll be using it for your next home purchase. When you are arranging the new mortgage, you'll need to provide the 90 day transaction history for that account. Because there's a large $30K deposit going into the account, the Lender requires a paper-trail to comply with the anti-money-laundering regulations. Your separation agreement will be the paper-trail.
The standard process when applying for a mortgage is to prove that the necessary funds for down payment and closing costs are available.
We prove this by providing the Lender with a 90 day transaction history of any bank or investment accounts that will be used to fund the home purchase.
The reason we need a 90 day transaction history is to comply with anti-money-laundering regulations. These regulations were put in place to prevent illegal money being used to purchase real estate. If there are any large deposits going into any of the accounts being used for the purchase, a paper-trail must be provided to show where the deposit came from.
For example, let's say you received a lump sum payment of $30,000 from your separation. You deposited the $30K into your chequing account because you'll be using it for your next home purchase. When you are arranging the new mortgage, you'll need to provide the 90 day transaction history for that account. Because there's a large $30K deposit going into the account, the Lender requires a paper-trail to comply with the anti-money-laundering regulations. Your separation agreement will be the paper-trail.
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.
