There are so 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.
How Does A Divorce Affect Your Ability To Buy A House?
Your finances will 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. 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.
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.
Keep The House
If your ex-spouse (or you) chooses to stay in the home, they may be required to buy you out of your share of the investment based on the current market value of the home. You can then use the buyout money to help you purchase a new home.
Do note, that regardless if you want to sell the house, you cannot sell it without the permission of your ex-spouse. However, depending on the exact circumstances you (or your ex-spouse) could get a court order that allows you to do so without their permission.
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.
Divorce can be a very tricky and complex situation, so not all scenarios involve the family home split evenly between the two ex-spouses. An agreement will need to be reached when a couple divorces.
In any case, even if you choose to sell the home and divide the money equally, you’ll need to consider all the costs involved, such as real estate commissions and mortgage prepayment penalty fees for breaking the mortgage early to sell.
How To Buy A House After A Divorce
While it’s possible to buy another home before your divorce is finalized, you may have an easier time if you take care of the legalities of your divorce 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 choose to buy a home after moving out of the family home following 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. Your divorce proceedings will impact your financial strength, especially in the event you’re required to pay lawyer fees, alimony, child support, or any other costs related to your divorce.
The family home and how it’s dealt with also play a role here. For instance, if you’re the one who is still responsible for making payments on the property or any other property you owned before the divorce, this will be included as part of your debt-to-income (DTI) ratio. On the other hand, if your ex-spouse was given the property and you remove yourself from the deed, then your lender will not include the mortgage payments when calculating your DTI ratio.
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. Ideally, you should keep your finances separate to ensure that your credit score accurately reflects your financial situation.
If not, your credit score could be negatively impacted, especially if your ex-spouse makes bad financial decisions. In this case, your ability to get a mortgage could suffer.
3. Ensure All Joint Debts Are Separated
If your ex-spouse is awarded the family home, make sure your name is removed from the title so you won’t be legally responsible for the property any longer.
4. Get Pre-Approved
If you’re ready to shop around for a new home, consider getting 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.
A pre-approval will come in handy when it comes to narrowing down your search to include homes that fit your budget, rather than wasting time looking at properties you can’t afford. Being pre-approved will also strengthen your offer when you make one. It will also help the mortgage approval process move along a little quicker after the seller has approved 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:
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.
When applying for a mortgage, you’ll need to qualify based on your income alone. That means the loan amount you’re eligible for will be much lower than it may have been when you initially applied with your ex-spouse unless you add a co-signer or purchase a home with someone else.
Keep in mind that any spousal or child support payments will be taken into consideration when your lender calculates your DTI. This can affect your ability to qualify for a mortgage as it increases your DTI ratio. If these payments are ending soon, consider applying for a house after they’ve ended in order to exclude them from your DTI. This may help you qualify for a higher loan amount.
Assets
Most mortgage programs require that you have a specific amount of capital on hand. Generally speaking, you should have about two months’ worth of mortgage payments — including principal, interest, taxes and insurance — in your reserves.
You’ll also need enough liquid cash on hand to cover the down payment and closing costs, as these expenses must be paid upfront.
Credit
As mentioned, your credit score matters when applying for a mortgage. If your credit score is lower than your ex-spouse’s, you may have a harder time getting approved for a mortgage. But if your score is higher, you may benefit from buying a home by yourself, since their low credit score won’t be weighing you down.
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 to increase the amount you can borrow.
Things To Help You Purchase a Home After a Divorce
If your finances took a significant hit following your divorce, it may impact your ability to secure a mortgage. Thankfully, there are some programs offered by the government to help you afford a home:
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP account, tax-free, that you can use toward the purchase of a home. You’ll need to repay this amount within 15 years. Repayments start in the second 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 four-year period. This period starts on January 1st of the fourth year prior to the year you withdraw money from your RRSP and ends 31 days before the date the funds are withdrawn.
For instance, if you withdrew money on April 30, 2022, the four-year period starts on January 1, 2018, and ends on March 31, 2022.
Land Transfer Tax Rebates
Land transfer taxes may apply when you buy a home in certain cities, in addition to the land transfer taxes charged by the province (except Alberta and Saskatchewan, in which a much lower transfer fee applies instead).
For example, buyers who purchase a property in Toronto will have to pay both a municipal and provincial land transfer tax, which essentially doubles these taxes compared to other cities where a municipal land transfer tax does not apply.
This can be a hefty fee to pay. Luckily, you may qualify for a land transfer tax rebate (varies by province or city) after you’ve made your payment. However, some restrictions apply.
For instance, if you previously owned a home, you won’t be eligible for this rebate. If your ex-spouse owned one, their ownership won’t affect your eligibility.
Buying A House After A Divorce FAQs
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?
Can I buy a home before my divorce is finalized?
Final Thoughts
Dealing with marital real estate is a significant financial challenge that comes with divorce. Housing costs are not always split 50/50 when a couple divorces, particularly when children are involved.
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 want to consider renting temporarily until your financial situation is more solidified.
