Till Death Do You Part? Not So Fast!
Nobody gets married thinking one day they will end up divorced. You exchanged vows that said “till death do us part” and that meant forever, right? Nope, not always. Sometimes you know it’s coming when you seem to be growing apart or going in different directions, but sometimes it hits you like a brick wall. Either way, it’s never easy.
I am no lawyer and I am not here to tell you what the laws are, but I can tell you that I know what people go thru during a divorce, because I have lived through one. I had left my job to start the family that I had long dreamed of. I was that gal that wanted nothing more than a family, a house with a white picket fence, and to live happily ever after. Realistic? I thought so. Achievable? For sure.
But along came that brick wall that stopped me short. Not only was I going through the emotional grief of the reality, but I was now a single mom with a young toddler, no job, no income and no money. Every day I woke up hoping that the situation I was living was just a nightmare and that it would be gone in the morning. But it wasn’t in my dreams, it was my new reality!
Divorce is virtually always complicated. Your lives have become so entwined that removing yourself from each other is a difficult process. The emotional upheaval can be much harder when there is the need to divide major assets such as a home and/or division of joint debt.
What Comes First?
Before you can agree on how to split up the assets and debts accumulated during the relationship, start with determining the value of your home, as it is likely the largest asset and debt. Once you know the value, subtract the balance owing on your mortgage. The difference between those two things is called “equity.”
And Next…the Single Most Important Document to a Lender is the “Separation Agreement”
There is no mortgage lender that is going to consider a mortgage for you if your financial obligations to each other are yet to be determined. You have to get this behind you before you can move forward.
Your “separation” is the process where partners reach a written agreement on custody arrangements for any of your children, child support, spousal support and the division of your assets and debts.
A “separation agreement” must come first and deals with the split of the obligations of both parties. “Divorce” comes second and it simply means that the marriage has legally ended.
The separation agreement is drawn up by a lawyer and will set out the conditions which need to be agreed upon by both parties. It is basically 3 words – WHO GETS WHAT? Or the other 3 words – WHO PAYS WHO?
What About the Mortgage?
As long as your name is on the mortgage, you are financially liable for the debt even if you no longer live there. That means that the mortgage will impact you and your ability to borrow money for anything….another house, car, credit cards, lines of credit, anything!
So What are Your Choices?
You Can Sell
While it’s tough to uproot yourself and your family, selling can often be the easiest choice. You both agree to sell the house, the mortgage gets paid and the leftover cash is divided between you. If you want to stay in the housing market, you could use your cash as a downpayment for another home.
You Can Own It
If it is an amicable divorce and no money is needed to pay the “leaving” partner, you would “assume” the mortgage. That means you qualify on your own for the outstanding balance on your mortgage, and the mortgage and title are changed from both names to just your name.
But not all divorces are amicable, and often the “leaving” partner wants their share of what the property is worth. This means that you would have to qualify on your own for the outstanding mortgage balance plus any additional funds that are required to pay the other partner.
It’s called a “Spousal Buyout”
It is so important that you speak to a knowledgeable mortgage professional for advice and direction. I am aware of separating partners who were told that one partner couldn’t buy the other partner out because there was not enough equity in the house. These clients were simply misguided because in the case of a separation, it is possible to structure a new mortgage that allows you to purchase the property from your partner for up to 95% of the property’s value.
But rest assured, anyone can refinance / take the equity from their home for up to 80% of the value of their property. But it is people in a separation that can borrow up to 95% of the value. Maybe we could call it a “perk” because that may be the one positive thing.
To qualify for this program, you must have good credit and you must be able to afford the mortgage on your income alone, along with any other debts you may have. The application must be approved by the lender and one of the mortgage default insurers (CMHC/Genworth).
Where two parties are on title to a property, and they are in the process of a legal separation where one party will keep the existing property, the following is required:
- Both parties must be on title to the property prior to the legal separation
- Finalized separation agreement
- Contract of Purchase and Sale
- A full appraisal will be required (to be ordered by your Mortgage Professional)
Let’s Look at an Example
Bob & Sue own a home. The home's current value is $550,000. With a mortgage balance of $475,000, they've got $75,000 of equity in the home.
The separation agreement dictates that they split the equity so each party gets $37,500.
It also states that the $20,000 in joint debt must also be paid and closed.
Sue wants to stay in the home with the kids who attend a nearby school & have a babysitter next door.
Bob & Sue agree to “sell” the home to Sue who earns an income and qualifies for a new mortgage. A purchase agreement is drawn up by a lawyer.
Sue is approved for a new mortgage for $522,500 (95% of the $550,000 purchase price). She requires a down payment of 5% = $27,500.
She will provide $27,500 from her $37,500 share of the $75,000 joint equity.
That will leave her with $10,000 and Bob with $37,500.
The $20,000 in joint debts are to be paid, so they will both pay half and the debts with be paid and closed.
Sue is left with the home, title and mortgage in her own name and no joint debts.
Bob is left with no joint debts, no mortgage, and $27,500 cash which he could use to purchase another home.
And So Why Should You Worry….
A divorce is a big change for a family and for your finances. It’s important to get the facts, whether through research or by consulting professionals to understand how the math might work out. Armed with facts, you can then determine how separation and divorce might impact your short, medium and long-term plans.
Did you know that in 2008, there were 70,226 divorces in Canada, or a crude divorce rate of 21.1 divorces per 10,000 population.
Provincially, Alberta was the highest with 24.7, followed by Ontario with 23.0. BC weighed in at 20.3% or 8903 divorces in 2008.
Did you know that an estimated 41% of marriages in Canada will end by their 30th wedding anniversary?
In 2008 Statistics Canada describes an average marriage as lasting 13.7 years.
This reality saddens me as I come from a generation of baby boomers who would relish at the thought of a couple being married to their 50th Golden Wedding Anniversary, or maybe even their 75th Diamond Wedding Anniversary! People are living longer and yet the marriages are shorter! My children and their children may truly never know how wonderful it was that people did actually stay married thru thick and thin, “till death do us part” for 50+ years!
And Moving Forward…
While you may have made a decision regarding your mortgage, the one thing that ex-couples need to ensure that they have a strong hold on before, during and after their separation/divorce, is their credit identities.
Check Your Credit Reports
Obtain a copy of your credit report from each major credit bureau: Equifax and TransUnion.
It is always wise to know what’s in your credit report, but at this critical time in your life, it’s even more important. Your credit report from the major credit bureaus will list your outstanding debts, open and closed, and will be helpful in knowing which accounts are joint and which need to be closed.
You can order your credit reports directly from the bureaus’ websites: www.equifax.ca and www.transunion.ca.
Close All Joint Accounts As Soon As Possible
This is easy to do if there is no outstanding debt. If you owe something on the account and can’t close it, freeze it so that no one can continue to use it. If it's a source of credit you'd still like open, see what you can do to get your name, or your ex's, removed and transferred to whichever one of you wants the account.
Make Your Minimum Payments (at least)
Make sure to make at least the minimum payment on joint credit card bills while you are in the process of closing/freezing joint accounts. Understand and protect your credit rating no matter what! It is essential for your next mortgage OR to get the current mortgage in your name only. A missed payment on any debt obligation with your name on it is like putting a hole in your own boat. Pay regardless (even if your spouse's car), keep receipts, settle-up later.
Make a Plan
This doesn't just mean taking care of debt; it also means preparing for some sort of savings. Trust needs to be built with companies that lend credit, and the greatest way to do this (aside from paying bills on time) is to show you can sock some money away.
Get Your Own Credit
Now is the time to start building your own credit. As we know, it takes time to establish ourselves in the eyes of creditors, so get on it now so you have a solid base to start from after your divorce.
Divorce Happens. Knowledge is Power!
If you aren’t the one in your family who manages the finances, now is your time. If you educate yourself and take a few precautions, you can reduce the financial impact of divorce.
I learned a lot, but I survived as we always do, even if it takes what seems like a lifetime to recover.
Stand up, dust yourself off and continue living. Life’s not over yet!
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BC & Alberta Mortgage Broker
When I'm not breaking the knuckles of different lenders for better mortgages for my clients - I'm kidding (or am I?) - you can usually find me visiting with friends or family, writing for this blog, or doing my best to keep from capsizing a dragon boat!
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