Navigating through a divorce or separation is challenging, especially when it involves splitting assets, including your home. Understanding your mortgage options during this transitional period is crucial to ensure both parties can move forward with financial stability. As a seasoned mortgage broker, I’ve compiled essential information to help you understand the various mortgage options available during divorce or separation.
1. Refinancing the Mortgage.
A common solution is for one party to refinance the mortgage, buying out the other’s interest in the property. This involves one partner taking over the mortgage solely in their name, potentially cashing out some equity to pay off the other partner. It’s essential to ensure the person refinancing has the financial capacity to afford the mortgage payments on their own. In cases where this isn’t possible, considering a co-signer like an immediate family member, friend, or new partner can be a viable alternative.
Here are three distinct refinancing methods to consider:
A) Insured Spousal Buyout Program
This specialized program allows one party to buy out the other’s interest at up to 95% of the home’s value. It includes a mortgage default insurance premium if the Loan to Value (LTV) ratio is between 80%-95%. This program has certain limitations, such as a maximum 25-year amortization period and restrictions on withdrawing additional funds from the property, except for paying off spousal debts as stipulated in the separation agreement. This option is advantageous when you require a higher LTV than what a standard refinance offers.
B) Standard Refinance
Offering more flexibility than the spousal buyout program, standard refinancing doesn’t involve a mortgage default insurance premium and allows you to refinance up to 80% of your home’s value. This option also permits a longer amortization period of up to 30 years and the freedom to use additional funds obtained from the property for various purposes, such as home renovations or personal debt payment. This method is beneficial when an 80% LTV suffices for your financial needs.
C) Mortgage Transfer
If your current lender doesn’t permit sole assumption of the mortgage, transferring to a new lender might be a solution. In a transfer transaction, all mortgage details must remain unchanged (e.g., mortgage amount, amortization period). It doesn’t allow for withdrawing additional funds for spousal buyout or debt payment. This option is fitting when the primary goal is to remove an ex-partner’s name from the mortgage without altering other terms.
To navigate these options effectively, it’s advisable to consult a mortgage broker for a free, no-obligation review tailored to your specific situation. Following this, you can proceed with an application to ensure you qualify for the mortgage independently, paving the way for the final separation agreement to complete the transaction.
2. Selling the Property
Selling the home and dividing the proceeds is another straightforward option. This choice is often made when neither party can afford the mortgage on their own, or both want to start fresh. The equity, if any, can be divided according to the divorce agreement or court decision.
3. Assumption of Mortgage
Some mortgages have an ‘assumption’ clause, which allows one party to take over the mortgage from the other without changing the terms of the original mortgage. However, not all loans have this feature, and the lender’s approval is required.
4. Keeping Joint Ownership
Some divorced couples choose to keep the joint mortgage temporarily. This option is feasible if both parties are amicable and financially responsible. It’s usually a short-term solution until other arrangements can be made.
Choosing the right mortgage option during a divorce or separation depends on your financial circumstances, relationship dynamics, and future goals. Consulting with a mortgage broker can provide personalized advice to suit your specific situation. Remember, the decision you make will impact your financial future, so it’s important to consider all options carefully.