Following are common questions that come up during the mortgage application for those impacted by separation or divorce.
What is the impact of divorce/separation on getting a mortgage?
When you are looking for a mortgage, if you indicate that you are separated or divorced, many lenders will require a formal separation agreement to move ahead with your mortgage application. The lender will look to see what specific amount of spousal support or child support is recorded. These amounts will be included in the mortgage application either as an addition to your ability to pay the mortgage, or a subtraction from the amount of money you have available to pay your mortgage. Depending on your individual circumstances, there are a few lenders who may not require a formal agreement to be in place.
Lenders have various guidelines and ratios they will review when deciding to approve or decline a loan. Two of these factors are Total Debt Servicing (TDS) Ratio and Gross Debt Servicing (GDS) Ratio. These two ratios are an indicator of your ability to make mortgage payments on time. Before the separation, you and your partner may have qualified for a mortgage up to a particular dollar amount. With the separation agreement in place, the mortgage amount you qualify for may be substantially less, as it is based on your income +/- an adjustment for spousal/child support.
Can I get a mortgage?
With recent changes, including the introduction of qualifying rates, the non-chartered bank lending market has seen tremendous expansion. We have seen people go to their bank, get declined, and assume they are going to be renting. Their bank may also decline them and send them to their own “B” lender.
Mortgage lending is competitive. One lender may decline an application, while another may approve the application. If you have a good relationship with your bank, and you are comfortable letting them know what is going on, speak with them. If you like what they have to offer, go with that. If you don’t like what they have to offer, or you are declined, shop around. Being a savvy shopper for a mortgage isn’t just about the rate but also the terms. Better terms may mean, among other items: a larger loan amount, longer amortization, less documentation to provide, smaller down payment, removing a co-signor from the application.
Review not only the planned living arrangements but also review how the final separation agreement will impact your ability to obtain a mortgage and what will be your source of the down payment if you chose to purchase a new home. Many couples may have a rental property or several properties. On occasion, we have seen one partner move to the rental property, while the other remains in the home. Before making any temporary or permanent change to your living arrangements be certain to speak with a lawyer.
Rent vs own?
In some cases, it may make sense to rent for a year. If you are self-employed, you can also use this time to better prepare your tax returns. We have seen cases where the business owner’s tax planning had an impact on the ability to obtain the best mortgage. Review what income you may be required to show to qualify for a mortgage of a certain amount. Then speak with your professional advisors to confirm if the changes outweigh the size of mortgage you qualify for.
About Mike Marshall: Prior to working with Dominion Lending Centres as a franchise owner, Mike spent over 18 years with 3 of Canada’s big 6 banks in real estate finance. He is a two-time winner of BMO’s Best of The Best Award. His website can be found at www.nccfinance.com