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While no one plans to become separated or divorced, it is an unfortunate reality that can significantly impact your personal finances and affect your ability to purchase a new home. If you're feeling anxious about your chances of staying a homeowner after you’ve become separated or divorced, don't worry, we've done this many times before. With a little guidance and effort, you can re-build your finances or use what you already have to get into a place of your own.
There are quite a few steps in any separation or divorce and a few tasks that will need to happen first before we can help you with that pre-approval for a new mortgage.
Complete your separation agreement
Canadian financial institutions will only distribute the proceeds of a sold matrimonial home once a signed separation agreement is in place that details how the assets will be allocated. Depending on the size and complexity of your shared estate, and the cooperation between both parties, this can be time consuming.
Remove your name from the title
Before you can apply for a new mortgage, it is imperative that your name is no longer attached to your previous mortgage. There are a few scenarios how this can happen:
- Your partner can buy out your half of the property. In this scenario, ensure all documents are legally binding and show that your name has been removed from the title and mortgage.
- You can buy out your partner’s portion of the property. In this case, be prepared to show that you can financially support the increased payments on your own and that you have a good credit score. You may be asked by the financial institution to provide an additional cash investment into the property. Again, ensure all documents are legally binding and show that your partner’s name has been removed from the title and the mortgage.
- You decide to sell the home and split the proceeds. Give us a call once the offer is signed and accepted. Until your name is off the deed, you remain responsible for the debt owed on the property, and it will affect your debt/asset ratio and leave you liable for any default.
Understand your true cash-flow
When you are buying on your own, support payments that you are paying or receiving will be factored into your cash-flow. This is a benefit if you receive support as you can include payments as part of your income. However, it is important to note that financial institutions will want to see at least three months of statements that reflect account-to-account transfers of support payments, consistent with the requirements set out in the separation agreement.
Know your options
There are options available to access funds, increasing your chances of pre-approval:
The Multi-Ownership Mortgage
You don’t HAVE to sell your home to qualify to be the sole owner. We offer a Multi-Ownership Mortgage that is specifically designed for people who have good credit but lack the income to qualify on their own.
Working with friends or family, this option allows you to buy your spouse’s portion of the property by refinancing the mortgage up to 95% of the appraised house value. It’s like buying your house for the first time, but with only five percent down. To qualify, you need to:
- Both be on title before separation
- Have a finalized separation agreement
- Create a legal offer to purchase to home from your former spouse
- Get a full legal appraisal of the property
Using your RRSP
In January 2020, laws in Canada were updated to make home purchasing easier for divorcees by providing access to the Canadian Home Buyer’s Plan. This benefit acts the same as the Home Buyers Plan, allowing you to borrow up to $35,000 from your RRSP, tax free, with 15 years to pay it back in full without a tax penalty.
We help people all the time get pre-approved for a mortgage for a new home after they have experienced a separation or divorce. Not sure how to get started? Give us a call and we'll help you get there.