It’s not uncommon for married couples to invest together in a property. However, due to unfortunate circumstances, sometimes marriages do fall apart. Ending a marriage leads to emotional turmoil for both partners. And a common question that many separating couples wonder is “How to divide a jointly owned real-estate property?”
When a married couple purchases a property, both individuals share equal rights on the property. While one partner might want to sell the property, the other partner might oppose it.
Therefore, when the marriages break, one partner needs to buy out the other person’s share in the real estate property. Understanding how to buy out your partner in the mortgage will help you decide on how to divide the most significant asset that you own together. Read more about spousal mortgage buyout.
What is a spousal mortgage buyout?
A spousal mortgage buyout can be defined as an arrangement where one partner pays their respective share of equity in the jointly owned real-estate property to the other partner. The co-owner that receives the equity can release their spouse through a spousal mortgage buyout.
Once you buy out your spouse in a mortgage, you become the independent owner of the real estate property. Your partner won’t pay any mortgage payments and will have no claim over the real-estate property. Vice-versa applies.
5 Mistakes to prevent while opting for spousal mortgage buyouts
Certain mistakes can complicate your spousal mortgage buyout and financial health. These complications might adversely impact your ability to secure a financial loan at fair rates for future investments. Therefore, you’ll need to avoid these five mistakes.
Not ensuring the relationship has truly ended
This is one of the gravest mistakes that most couples make. Before ending a marriage, you need to follow a mandatory separation phase. Therefore, if there’s the slightest chance that you and your partner might reunite, don’t initiate the spousal buyout process. This will not just make the property ownership complicated, but you’ll also end up wasting time and money.
Not getting a legally binding separation agreement drafted
Once both of you have made a permanent decision to end your marriage, you can start the spousal buyout process by getting a legally binding separation agreement drafted from a qualified lawyer.
The legally binding separation agreement states the following:
- A legal declaration that the married couple is proceeding for a divorce.
- Custodial arrangement for any children and spousal support.
- The legal division of the couple’s assets is decided jointly, including mortgage.
In Canada, this separation agreement is necessary for a spousal buyout mortgage. The agreement also reduces the risk of developing complexity throughout the separation and divorce phase.
Determine if you’re financially secure to keep the house
The most fundamental step for divorce buyout is understanding the true value of your real estate property. For example, if your home’s financial worth is $500,000, and your partner is entitled to 50% of the property (the percentage can vary depending on the agreement), you’ll need to arrange $250,000 to keep the house and buy out your partner.
Additionally, to avoid errors and complications, it is recommended that you get your property appraised by an experienced professional or mortgage broker. This way, you can ensure both receive a fair share of the property.
If you’re keeping the property, you’ll also need to requalify for the loan.
Not making an early decision on spousal mortgage buyout
Even if you aren’t planning to make a real-estate investment immediately, understanding and completing a spousal buyout mortgage in Canada is crucial to prevent complications in your financial future.
Ending up with a default on your financial records will make it challenging to secure a mortgage in the future.
Not considering all options to settle the claim on a joint property
Once you decide to keep the house and qualify for the mortgage, you’ll have several options for arranging the spousal buyout:
- Refinancing: You can go for options such as a home equity loan and extend your mortgage to 95% of your real-estate value. Discuss with your mortgage broker for a better rate while refinancing.
- Increase home loan limit: Increase the financial value of your home loan for a divorce settlement.
However, before opting for the choices for spousal mortgage buyout, ensure the following:
- Without your partner’s income, you need to have a strong credit score and meet the standard bank policy.
- If you want to secure a loan amounting to more than 80% of your real-estate value, you might require paying Lenders Mortgage Insurance (LMI).
Fortunately, a home equity loan offers simple and easy financial aid for spousal marriage buyouts. With a home equity loan, you don’t need to have a good source of income credit score or comply with the standard bank policy. Your home is considered as a token for security.
What are the benefits of securing a home equity loan?
Divorce can be a rough patch for many couples, both emotionally and financially. Home equity loan offers certain benefits:
- Easy to qualify and secure: You don’t require a stable income or a good credit score to qualify for the home equity loan. Your proof of ownership, current home valuation and mortgage details are enough in most cases.
- Quick cash transfers directly in your bank account- you don’t need to wait for days for verification, qualification and hundreds of other background checks.
- Competitive rates of interest: A low credit score might attract high-interest rates. Since home equity loans are secured, you can qualify for a competitive interest rate.
Ending a valuable relationship and going separate ways is never easy or pleasant. You want the entire separation process and legal obligations to end at the earliest. Even though discussing the financial settlements and asset division might seem unpleasant, faster processing is better for both individuals (not just emotionally but financially).
A house or any other real estate property is one of the most significant assets a couple owns together. Therefore clearly understanding the various ways of a spousal buyout is essential. Connecting with a mortgage broker can help you decide the best way to settle a spousal buyout.