*This post was created in collaboration with Alpine Credits
There are many details to iron out when a couple divorces, including what to do with the family home.
If you’re getting a divorce and currently own a home with your soon-to-be ex, you have a decision to make: sell the home and split the proceeds, or keep the home. If you plan to move out of the family home, you’ll need to either find a place to rent or buy.
But if you choose to make a new home purchase, how will your divorce affect your ability to buy a home?
Let’s dig a little deeper into the process of buying a home after a divorce.
Key Points
- Your divorce could diminish your finances to some degree, which can have an impact on your ability to secure a mortgage by yourself.
- Your income, debt level, and credit score will all factor into your ability to get approved for a mortgage to buy a house after a divorce.
- It’s highly recommended to wait until your divorce is finalized before buying a house on your own.
Can You Get A Mortgage To Buy A House After A Divorce?
You can get a mortgage after a divorce, however, your lender will consider all the ongoing costs that you will incur after your divorce when determining whether to approve you for a mortgage or how much to approve you for.
How Does A Divorce Affect Your Ability To Buy A House?
Your finances could shrink to some degree after a divorce. Depending on how the court divides your assets and debts between you and your ex-spouse, it can impact several aspects of your finances.
Moreover, you may still be required to cover part of the debts that you originally shared. You may also be required to pay alimony or child support, which can put a significant dent in your finances.
With your incomes separated, purchasing a house after a divorce can be difficult. Given this, you may have less money to put towards a home purchase.
How To Buy A House After A Divorce In Canada
While it’s possible to buy another home before your divorce is finalized, it’s best to finalize your divorce and understand what your finances look like before jumping into a new home purchase.
Here are a few things to consider when buying a home after a divorce.
1. Finalize Your Divorce
If you want to buy a home after separation, your lender will likely want to see your legal separation agreement. You may also have to produce a property settlement agreement if you have one.
This order will tell your lender what you’re responsible for paying versus what your ex-spouse is obligated to take care of. The details of this agreement could have a significant effect on your debt-to-income ratio (DTI) — which is the percentage of your monthly gross income dedicated to paying your debts — when applying for a new mortgage.
2. Calculate How Much You Can Afford
It’s essential that you determine how much house you can afford to purchase, which is why you’ll need to figure out your income and ongoing expenses following your divorce. These costs will affect your ability to come up with a down payment and make mortgage payments.
If you have a family home, how it’s dealt with will also play a role here. The court will issue a judgment that divides your marital assets and debts by determining what each person owns and is required to continue paying.
3. Ensure All Joint Debts Are Separated
The court will issue a judgment that divides your marital assets and debts by determining what each person owns and is required to continue paying.
If your ex-spouse is awarded the family home (if applicable), make sure your name is removed from the title so you won’t be legally responsible for the property any longer. Conversely, make sure your ex-spouse’s name is no longer on the title if you buy them out and retain ownership.
4. Get Pre-Approved For A Mortgage
If you’re ready to shop around for a new home, consider getting pre-approved first. This will give you an accurate idea of how much you can afford to spend on a home purchase and how much of a loan your lender will approve you for.
Being pre-approved will also strengthen your home offer when you make one. It will also help the mortgage approval process move along a little quicker if the seller accepts your offer.
Factors To Consider When Buying A House After A Divorce
There are a few important things to consider before you purchase a home following a divorce, including the following:
Your Income
Before your divorce, you may have been part of a two-income household (if your spouse was also working). But now, you’ll need to figure out how to cover your household expenses with just one income, including a new mortgage.
Do Spousal Or Child Support Payments Affect Your DTI?
Spousal or child support payments will be taken into consideration when your lender calculates your DTI. If you’re the one making these payments, your DTI ratio will increase, which can negatively affect your ability to secure a mortgage. If these payments are ending soon, consider applying for a house after they’ve ended to exclude them from your DTI. This may help you qualify for a higher loan amount.
However, if you’re the one collecting these payments from your ex-spouse, your income can effectively increase and strengthen your ability to get approved for a home loan.
Your Assets
You’ll also need enough liquid cash on hand to cover the down payment and closing costs, as these expenses must be paid upfront.
Your Credit Score
Lenders typically assess borrowers’ credit health and generally require good credit when lending money. A higher credit score will help increase your chances of getting approved for a mortgage on your own.
If your credit score could use some improvement, take some time to give it a boost before applying to maximize your chances of loan approval and increase the amount you can borrow. You can help improve your credit in the following ways:
- Make timely bill payments
- Reduce your debt
- Check your credit report for errors
- Don’t close old credit accounts
- Don’t apply for new credit
Why You Should Wait To Buy A Home After Divorce
It’s best to wait until the legal proceedings surrounding your divorce are finalized before house hunting for your own home. You’d be taking a big risk if you bought a home before your divorce is finalized. Here’s why:
Your New Home Could Be Considered A Marital Property
If you purchase your new home with money from a joint account with your soon-to-be-ex, the court could view the home as a marital property. In this case, your ex-spouse could attempt to stake a claim in the home.
In most cases, property accumulated during the marriage is split between the spouses. So, if you’re still considered married and you buy a home, you could be putting yourself in a sticky situation in terms of who has a potential claim in the home.
Divorce Can Affect Your Finances
As mentioned, a divorce is expensive. Not only do you have to pay legal fees to dissolve your marriage and deal with marital asset division, but you could be left with weaker finances when all is said and done.
Should You Buy A House After Divorce Or Stay In Your Matrimonial Home?
If you and your ex-spouse own a home together, you can either keep the house or sell it. Depending on whether the home is sold or your ex-spouse plans to continue living there, you could be owed money in some form.
Let’s explore each option to help you determine which is best for you.
Keep The House
If one party wants to keep the home, they will have to buy the other party out. For instance, if you choose to stay in the home, you may be required to buy out your spouse’s share of the investment based on the current market value of the home. This is an option if you have the finances to do so.
The opposite is also true: if your ex-spouse wants to remain in the home, they’ll have to buy you out. You can then use the buyout money to help you purchase a new home.
Sell The House
If you agree to sell the house, the profits (if there are any) may be divided equally between the two of you (depending on your divorce/settlement agreement). You can then use the proceeds of the sale of the home to put toward a new home purchase.
| Note Even if you choose to sell the home and divide the money equally, you’ll need to consider all the costs involved. This includes real estate commissions and mortgage prepayment penalty fees for breaking the mortgage early to sell. |
Programs To Help You Purchase A Home After A Divorce
If your finances took a hit following your divorce, it may impact your ability to secure a mortgage. Thankfully, the government offers programs to help.
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) allows you to withdraw up to $60,000 from your RRSP account, tax-free, to purchase a home. You’ll need to repay this amount within 15 years. Repayments start in the fifth year after the funds are withdrawn.
Keep in mind that the HBP is for those considered first-time buyers. You’re considered a first-time buyer if you did not occupy a home that you or your spouse owned in the last four years. This period starts on January 1st of the fourth year before the year you withdraw money from your RRSP and ends 31 days before the date the funds are withdrawn.
How Can I Qualify For The HBP After Owning A Home?
Since you’ve either already owned your matrimonial home or lived in a home that your spouse may have owned, you technically would not be classified as a first-time home buyer after a divorce. Therefore, you wouldn’t qualify for the HBP.
However, under the HBP, a first-time home buyer is defined as a person who has not owned a home, nor lived in a home that their spouse owned, over the last four years. But if your home purchase takes place after this four-year window, you may be considered a first-time buyer and may qualify for the HBP.
Final Thoughts
Dealing with marital real estate is a significant financial challenge that comes with divorce. If you’re going through a divorce, it may be best to wait until the dust settles before embarking on a new home search. Until then, you may consider renting temporarily until your financial situation is more solidified.
Buying A House After A Divorce FAQs
Can you sell your house without your partner’s permission?
Who gets the house in a divorce in Canada?
If you stay in your family home, should you refinance it?
How do I remove my spouse from the deed of my home?
Is it hard to qualify for a mortgage after a divorce?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
