4 in 10 first marriages in Canada now end in a divorce, and that trend is continuing. For Canadians, divorces are now common at all stages of life, but never more so in the early years, when most couple’s financial situation is not on a strong foundation. Quite often the family home is the marriage’s largest single asset, and the mortgage the largest liability, getting knowledgeable mortgage advice during this process can often simplify negotiations at a very stressful time for all parties.
A marriage break-up is traumatic for all involved, and selling and/or dividing the family home can be an emotional process. Discussing your options with an unbiased and experienced professional is one way to ease some of this stress and better understand your options.
This is some of the best advice Alberta Mortgages has compiled from our research and years of experience:
Continue to Pay Your Bills
As upset as you may be with each other, refusing to pay any common debts will only make your ability to refinance, or eventually move on financially by qualifying for a new mortgage in the future, extremely difficult. As long as receipts are kept, you can always seek reimbursement for the neglectful partner’s share before when your settlement is finalized.
Separate your Finances
It is important to establish good credit on your own as soon as possible. This can be an issue in cases where one spouse was primarily responsible for managing the home finances. A separate (non-joint) credit card is a good start, as is an individual cell phone bill or any other monthly recurring payment that can demonstrate an individual’s credit responsibility. Requesting a credit report and monitoring it throughout the separation and divorce proceedings will ensure nothing is missed and you are maintaining a good standing in the view of our credit reporting agencies (www.equifax.ca)
Wrap it up Quickly
As harsh as it may sound, the faster you settle your financial issues and move on, the better it is for all concerned. There is more certainty around the value of assets and liabilities at the end of the marriage. The longer period that passes between the end of the marriage and the eventual valuation and division of assets, the more difficult this process becomes and the greater the chance that something will fall through the cracks, legal bills will multiply, and even more bitter feelings begin to cloud good financial judgment. A compromise to bring the process to resolution will quite often pay handsome dividends in the future in terms of stronger credit base.
An experienced mortgage professional will help you understand your financing options, but will be unable to secure a final lender commitment to act on one of these options until you have an executed separation agreement or divorce decree.
Some common scenarios are as follows:
One partner can opt to buyout the other’s interest in the matrimonial home, and this most often is the most practical solution to bring closure to the situation. When children are involved, retaining their childhood home is often considered in their best interest. CMHC and the Canadian government have recognized this and are now providing a product that allows a divorcing partner to obtain financing up to 95% of the value of the matrimonial home, subject to qualification. An appraisal completed by an Accredited Appraiser is required to determine the value.
Selling Your Home
The most straight forward approach to dealing with the family home is to sell it and divide the remaining equity after expenses. This will leave both partners free to obtain new properties and financing options individually tailored to their new financial circumstances. Child Support and alimony will be factors in determining individual partner’s debt service ratios for qualification purposes on the new mortgage (see more detail below)
Co-ownership after Divorce
Some divorcing couples choose to maintain the matrimonial home after divorce on a partnership basis; this is most common in situations where children are involved. A comprehensive co-ownership agreement prepared by a lawyer would be highly recommended in this case. It is important to note that the debt service obligations on a co-ownership deal may impact the non-resident partner’s ability to obtain other financing.
How Do Support Payments Impact Mortgage Qualification
Support and alimony payments are viewed by lenders as a monthly liability that must be included in calculating a client’s debt service ratio for the partner responsible for paying the support.
The general rule for most lenders is the spouse receiving support is entitled to include in their income ½ the support payments for the purposes of determining their debt service ratios BUT in many cases only after 1 year of consistent payment history. They will look to the separation agreement and recent (12 months) bank statements to confirm receipt and/or obligation.