Darren Robinson is a mortgage broker in Barrie. He helps many clients who are going through a divorce refinance their home and get on their feet. He has some interesting and suprising advice. Darren is with Dominion Lending in Barrie. He wrote the following excellent blog:
How does separation or divorce impact my home & mortgage?
On the unfortunate occasion when a marriage is dissolved, there are a number of financial questions that need to be answered. The most important is what to do with the matrimonial home? The two easy answers are; 1) sell it, divide the equity & move on or 2) one party buys out the other party and stays in the home.
While option one might sound like the simplest option, if the couple have kids it is usually better for them to keep some type of consistency in their lives. Staying in the home will allow them to remain at the same school & keep their neighbourhood friends which can be very comforting. Also, option one might not be financially possible due to mortgage penalties or a weak real estate market.
In order for option two to work the spouse will have to ensure that they will be able to afford to stay in the house on one salary. The current lender will need to re-qualify the applicant on their own before they will allow the ex-spouse to be removed from title and released from the mortgage (it is extremely important that both these steps are taken because it is possible for someone to be removed from title but still remain responsible for the payments if the mortgage is in arrears). This transaction normally doesn’t involve any lender penalties but a real estate lawyer’s service will be needed to transfer the title.
If, as part of the separation agreement, the spouse remaining in the home is required to make a lump-sum payment to the other, they may need to refinance their mortgage to enable equity to be taken out of the property. This may or may not involve lender penalties (check your lender’s policies). In many cases the lender will allow you to leave your current mortgage intact but add refinance funds to the original balance in a transaction called a blend & extend, avoiding any penalties. There are lending rules in place in Canada that will only allow a home owner to refinance their mortgage to 85% of the home’s value. This can be very limiting to couples who have less than 15% equity in their home, so CMHC (Canadian Mortgage & Housing Corporation) will allow, on a case-by-case basis, the transaction to go through as a purchase to 95% of the home’s value. This can then free up most of the capital the couple has accumulated in the house for a more simple division of assets.
If the spouse staying in the house does not qualify for a new mortgage on their own there is the possibility to add a co-signer/co-borrower to the mortgage. This applicant is normally a parent or sibling who has good credit/income and is willing to take over payments on the home if the loan goes into default. An alternative option is to leave the ex-spouse on title but I highly recommend against this because no matter how amicable your relationship is now you never know how your relationship will evolve in the future.
Keep in mind that most lenders require a finalized separation agreement be in place before they will consider a new approval. They will need complete visibility/disclosure of any alimony or child support payments, as they will need to be calculated when qualifying the client for a new mortgage.
When facing separation or divorce it is always best to sit down with a mortgage broker for a free consultation. They will be able to outline viable options and work through different scenarios throughout the separation process to ensure you’re making the best financial decision available to you.
If you live in the Barrie, Ontario area I’d be happy to set an appointment at my office (62 Commerce Park Drive, Unit N) to discuss your options and detail a plan to move forward. You can call me at (705) 737-6161, (888) 737-6162 or by email firstname.lastname@example.org. Alternatively you can find more information about mortgage financing at www.darrenrobinson.ca.