Divorce, separation and the mortgage: What you can do to keep your home

Let’s not delude ourselves: whether or not a divorce or separation is amicable, there are important decisions to make, especially when there is a mortgage involved.

There are three possible outcomes in a situation like this:

• Selling the house, meaning that both former partners have to move
• One ex-partner buys back the share of the other partner and becomes the sole owner to remain in the home
• One person’s shares being given to the other, making the latter the sole owner, responsible for the balance of the mortgage

If you absolutely want to keep the house and take on financial responsibility for it, including the mortgage, skip the coming section and go directly to the one after!

Selling the house and both ex-spouses move: A “simple” solution but not always ideal in a separation

The two ex-spouses can agree to leave the property and sell it to make things less complicated. In this situation, the transaction is similar to any other sale. Both parties will receive their share of the profits after the fees and mortgage balance are deducted. 

Note however that even though this approach simplifies things in one way, it forces both former spouses to find new homes, which isn’t always easy in the current real estate market. What’s more, suddenly finding yourself in a single-salary household can make it more challenging to get a mortgage for a new home from a financial institution.

A little further on, I will explain how a second mortgage from a private lender can let one of the ex-spouses avoid moving, along with the many direct and indirect costs it involves.

Because, yes, it is possible to keep the property even if you don’t qualify for a mortgage from a large bank.

Here’s what you need to know if you want to keep a property in a separation or divorce

Taking on full responsibility for the financing

When the loan balance is high relative to the property value, it may be preferable for the person leaving to just abandon their share of the property. The remaining person then becomes the sole owner and is responsible for the mortgage financing.

If the person keeping the house does not meet the income and credit requirements of the financial institution, they may have to get the help of a co-signer to refinance the mortgage. 

While the costs involved in this option are generally lower than those of the next option I will describe, there will still be notary fees and a transfer tax to pay.

Keeping the property by buying out the former partner’s shares

This is the option we see most often. It involves determining the value of the property and then deducting the value of the shares belonging to the partner leaving the home. In other words, the partner who keeps the house must pay out the theoretical profit that selling would bring in. Using the services of a professional appraiser will give you an impartial evaluation that can help avoid further misunderstandings.

Here’s an example.

The property is worth $500,000 and the mortgage balance is $300,000.

The gross profit obtained in selling would therefore be $200,000.

Note however that if the mortgage is not at the end of its term, you will very likely have to pay a penalty to the bank.

In our example, if the penalty for breaking the mortgage contract is $10,000, then the net profit would be $190,000.

Half that amount, so $95,000, would be given to the former spouse who is selling their shares.

The person becoming the sole owner must then submit a new financing request. This mortgage will cover the balance of the previous loan ($300,000), the amount due to the former spouse ($95,000), the notary fees and half the early payment penalty.

Like in the previous scenario, nothing guarantees that the mortgage request submitted by the one who wants to keep the property will be accepted. Here again, a co-signer may be required, which is not always easy to arrange.

Private lender: An advantageous solution to buy back a spouse’s shares

Private lenders don’t work with the same criteria as conventional banks. Because their approval policies are more flexible, they can allow some people to keep their homes after separation, even if their credit isn’t spotless or their income doesn’t meet the big banks’ criteria. 

With a private mortgage, financing is allocated according to the property’s net value. The lender can judge the real value of the investment and take into account factors that are often overlooked by conventional mortgage lenders. The private banker can offer financing up to 75% of the property’s market value.

If you have the means, and if you have your current bank’s permission to take on the full mortgage by de-committing your former partner, then buying out your ex can be done with a second mortgage. This lets you keep the conventional mortgage, which has a lower interest rate.

What’s more, the process is very simple, which lets you quickly move on to other things and begin your new life.

Takeaways

Even though some options, like refinancing with a private lender, are often simpler and more efficient, managing a real estate asset in a divorce or separation is not something to be taken lightly. Whether or not you want to keep the property, it’s essential to make rational decisions and not act emotionally.

If you decide to keep the property, just remember that if your financial institution makes life difficult for you, a private lender can offer a solution that will help you get through this tough period, without bogging you down in endless administrative waiting times and mortgage shopping.