Separating And Want To Keep Your Home?

You Can Do It With 5% Equity

One major decision in separations is what to do with the matrimonial home. There is an option available to separating spouses that is often overlooked or not offered by some mortgage lenders.  In addition to selling or refinancing, there is a Spousal Buyout option.

In Canada, you can refinance your home up to 80% of it's value. This is a great option for those with significant equity in their home.  If you more recently purchased and have less equity, refinancing may not be enough to buy-out the other spouse, pay off joint debts, and keep the minimum 20% equity required in the home.

Spousal Buyout is another option available to you.  If you are going through a separation or divorce, both parties are currently on title, and you have a legal separation agreement, you can purchase the property from your spouse using 5% of your equity as down payment.  This allows you to unlock 15% more equity than a refinance if you need it to pay out the other spouse or pay off matrimonial debts.  It is a program offered by mortgage default insurers, but not by all banks and lenders.

(NOTE: A version of this option known as a Dissolution of Relationship is also available for siblings, friends, or other forms of joint ownership)

Steps In A Spousal Buyout

1.         SEPARATION AGREEMENT:

It is important to speak with a mortgage professional early on in this process so your separation agreement addresses the items necessary for this program to be used.  (For example - car loans or lines of credit may need to be noted as "joint" marital debt to be paid out).

2.         PRE-QUALIFICATION:

The person staying in the home will need to qualify for the full purchase on their own based on income, credit, etc. Again, speak to a mortgage professional early on to confirm you qualify for the new mortgage amount on your own, taking into consideration any new child and spousal support commitments. Since you will be paying out your previous mortgage and setting up a new one, you can do this using a different lender than your current mortgage lender.

3.         DOCUMENTS:

This is basically a new purchase so a lender will need all the standard documents to confirm your income, employment, and proof of additional funds to cover closing costs.  Also, an Offer to Purchase selling the home from both parties to the one spouse must be drafted, signed, and provided to the lender.

4.         APPRAISAL:

All lenders will request a full appraisal to use this program.  It will confirm the new purchase price is less than or equal to the current value of the property.

5.         CLOSING COSTS:

Similar to a refinance, the down payment for this option comes from existing equity.  But you should also be prepared for additional transaction costs including legal fees, appraisal cost, any applicable prepayment penalties charged by the original mortgage lender, and mortgage default insurance premiums (ie. CMHC).  If you previously paid these premiums when you initially purchased, we may be able to save you some money by topping up your premium versus paying the entire premium again.

If you are going through a separation, please call me to discuss the mortgage options available. And if you know someone who may benefit from this information, please share it.  There are major banks in Canada who do not offer this program and so they may not hear about it from their bank or any other avenue.