How Does Divorce and Separation Affect Your Mortgage?

How Does Divorce and Separation Affect Your Mortgage?

Divorce and separation. These are not easy conversations to have, but they are a reality for some.

A major worry for couples in this situation is deciding what happens to their shared belongings, especially their house and mortgage.

What are Divorce and Separation?

In legal terms, divorce refers to the dissolution of a marriage by a court of law. It involves a formal process where both parties agree to end their marriage legally.

On the other hand, separation is when a couple decides to live apart without formally ending their marriage.

The First Step

If you're going through a separation or divorce, the first step is to start discussing it. It’s not a fun conversation to have, but you have to ‘rip off the bandaid’ and get the issue settled. There are two scenarios we find people fall into.

Scenario 1

The separation is not amicable and there’s a lot of back and forth.

Scenario 2

The separation is amicable and there’s no back and forth. The conversations often sound like, “well, whatever you want, I’m cool with it.”

In both scenarios, the division of assets including the home, can drag out. It’s best to work through these discussions quickly to avoid as much stress and cost as possible.

We know it’s not always possible, but starting the conversation with your mortgage broker, financial advisor, and lawyer early gets things moving in the right direction.

How Does Divorce or Separation Affect Your Mortgage?

If you have a joint mortgage, both parties are equally responsible for the mortgage payments, regardless of who lives in the marital home. This means that even if one person moves out, they are still legally responsible for mortgage payments (unless an agreement states otherwise). Failing to make payments can harm both parties' credit scores and financial stability. Before you can look at doing anything with the home, there needs to be an official Separation Agreement. This outlines the financial obligations of each spouse. Even if the payments are going to be zero for one party, lenders need to see that in writing.

What are your options?

1. Sell the Home

One common solution is selling the house and dividing the proceeds. It is “the easiest” solution to break any financial ties if both parties agree. However, selling may not be the right solution depending on where you’re at in your mortgage. If you have a fixed-rate mortgage and are near the beginning or middle of your term, you can face a large cost to break your mortgage. There’s the possibility that there’s not enough equity in the home. The home could also sell for less than the mortgage amount. If the house doesn't sell for enough to pay off the mortgage, both parties are jointly responsible for paying the balance.

2. Refinancing the Mortgage

Another option is for one party to refinance the mortgage in their name. This means they would take over the mortgage payments for the family home entirely, removing the spouse from the mortgage. There are mortgage programs specific to this situation, typically called a Spousal Buyout Mortgage or Program. You can finance up to 95% of your home's value. You can pay your ex-partner their portion of the home's equity. This payment is added to the total mortgage amount.

However, the person taking over the mortgage must qualify for the new loan based on their income and credit history. To qualify for this program, you must be able to afford the mortgage on your income alone. If you receive spousal support, we can include this in your income as well. We might be able to have someone co-sign the loan if you cannot afford the mortgage alone. Both parties must currently be on the deed to the property to complete this program. Your ex-spouse is removed from the title when they file a ‘quit claim’ with the municipality or city.

You will need both the Legal Separation Agreement and a Purchase Agreement prepared by your lawyers to proceed with this program.

A Note on Credit: While a divorce won’t show on your credit report, there can be some impacts to your credit score. If you and your spouse have joint credit card accounts, they will likely be closed when you divorce. This can have a negative impact on your credit score, impacting your ability to qualify for a mortgage later. Depending on your situation, keeping joint credit accounts open until they are paid off will help maintain your credit. This will be outlined in your Separation Agreement.

3. Assuming the Mortgage

In some cases, one party might be able to assume the existing mortgage. This is an Assumption Agreement. In this case, your ex-spouse assigns their share to you. You become responsible for the entire mortgage, taking over the terms and payments. Both you and your ex-partner’s names remain on the mortgage. However, not all lenders allow this. The person assuming the mortgage must still meet the mortgage lender's criteria. This information is enough to get the conversation going. We have to make it clear (if it’s not obvious already), that divorce and separation affect each couple’s mortgage differently.

Lean on your financial team to help you through this stressful time. If you want to know your options, schedule a free consultation.