Whether your divorce was amicable or less than friendly, the opportunity to begin your life on your own terms is an exciting prospect once the dust settles. Having your own home in a space that doesn’t require a vote on wall colours and whether you want throw pillows on the bed is a pretty good situation. It’s also a good project to help you focus on the positives of creating a new life. However, now that you’re flying solo financially, the type of home you can afford might feel limited. Here we look at how and if divorce impacts your ability to buy a home, with tips on taking this exciting step sans a partner.
Does Divorce Impact You Buying a Home?
The main impact divorce has on buying a home is financial. When you go from two incomes to one, you quickly learn how expensive things are in Toronto. Also, divorce can impact your finances in a few other ways, including the assets you keep, the debt you’re stuck with, and other financial implications specific to your situation.
For example, were you awarded alimony or child support, or did the court find you’re the one forking over the money? What was once a shared financial burden now becomes a far more significant weight that can limit your ability to buy or even rent the type of home you want or are used to. All these things impact your ability to qualify for a mortgage and own a home.
When you’re ready, the following posts will give you some great insight into buying your next home:
- Is It A Good Idea To Buy A Home Without Seeing It Irl?
- What Is A Status Certificate, And Why Do I Need One?
- 10 Signs A Home Is “The One”
Finding a Down Payment After Divorce
If you and your ex owned your home and decided to sell, any profits are divided equally between you in most cases. If your spouse wants to stay in the home, they need to pay you for your share based on the current market value. Either way, you’ll have money to put toward a down payment.
Of course, the money you end up with is less the cost of selling which can include mortgage prepayment fees if the mortgage term hasn’t yet ended, commission for the agent, legal fees, etc.
If you did not own a home, then considering average home prices in Toronto, you’ll need at least $50,000 for the average condo and upwards of $200k for a townhouse, semi, or detached.
Condo vs. House
If you have your down payment figured out, you can get a realistic picture of what type of home you can afford. One good thing about condos is that they are a) more affordable and b) lower maintenance. Since you have to manage all the repairs and things like gardening on your own, a house might be too much of a hassle. However, you also have to do the math to weigh condo common element fees against potential house maintenance costs to make the best decision for your finances and lifestyle.
Applying for a Mortgage After a Divorce
It’s best to wait until your divorce is finalized if you want to buy a home. Lenders want to see the paperwork, particularly your property settlement agreement, if you owned your home. Lenders also want to know where you end up once all is said and done so they can determine your debt-to-income ratio (DTI). This magic number tells them how much of your income goes towards debt. So really, when it comes right down to it, being divorced doesn’t impact applying for a mortgage, as it all boils down to proving you can afford a mortgage and pass the stress test. Let’s dive a little deeper into applying for a mortgage solo.
Passing the Stress Test
First things first. You need to pass the mortgage stress test, which means you need to prove to the bank that you can afford not just the current interest rate but also manage a rate increase of 2%. So, in today’s market, you’re looking at an interest rate of about 7%, give or take a few points. That’s high. You’ll need an income of at least $200k to qualify.
Consider the following:
- Down payment: Whether you sold your matrimonial home, bought out your spouse, or are relying on savings, your down payment is the first number you need to consider. As mentioned above, you’ll need from $50,000 to $200K for the average home in the 416 area of the GTA. If you fall short, and did not own a home, the Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 tax-free from your RRSP, so this is something worth looking into.
- Divorce expenses: Figure out the costs of your divorce, including new debt, alimony, and child support.
- Income: Calculate your net income and deduct your debt, alimony, and child support, as well as your typical living expenses, to understand how much money you’ll have left to cover your housing costs.
- Marital assets/debt: Calculate what assets and debt the court applied at the time of your divorce. Keep your finances separate from your ex as soon as possible to start establishing your own credit rating. Bad debt and credit scores from your spouse can impact your ability to qualify for a mortgage, so remove your name from all shared accounts. Focus on paying down debt to improve your chances of qualifying for a mortgage.
- Pre-approval: With all your finances in order, apply for pre-approval with your bank or mortgage broker. If you aren’t approved, ask why, so you can devise a plan. For example, can you improve your credit score, save more for a downpayment, or find other financial support to improve your situation? If you do qualify, you’ll know your maximum budget, making your house hunt easier. Another benefit of pre-approval is that you lock into the current interest rate, and should that interest rate drop, you qualify for the better rate.
Tips to Financially Prepare to Buy a Home After Divorce
We always advise our divorced clients to get their finances in order and look at their options before they decide to buy. This includes:
Timing it right
By waiting until the divorce is final, you’ll have a realistic picture of your income. This includes collecting alimony and child support that helps boost your income for an improved DTI. Also, any debt resulting from your divorce should be paid off to reduce your DTI ratio. One final tip for timing: If you’re paying child support and your kids are teens, consider waiting until you no longer need to make payments so the bank can exclude that cost from your DTI.
Ramp Up Those Savings
On top of your down payment, you’ll likely need to save at least two mortgage payments. We can also tell you how much you’ll need for closing costs to ensure you don’t financially strain yourself.
Improve Your Credit Score
Make sure you pay down debt before applying for pre-approval. Literally, every penny counts when trying to qualify for a mortgage. If you want to reestablish your credit, pay all your bills on time (auto payments work well to keep your payments on track), and consider applying for a credit card in your name. Use the credit card each month for essential purchases like groceries and then pay the balance immediately to start building a solid credit history.
Speaking of financing your purchase, here are some resources that are handy to have at your fingertips:
- 3 Ways Your Home Can Help Pay Down Your Tiresome Mortgage and One to Avoid
- Getting Pre-Approved for a Mortgage
- Calculate Your Mortgage
What To Do If You Don’t Qualify for a Mortgage
If you don’t qualify for a mortgage, there are a few things you can do:
- Improve your credit score
- Find ways to increase your income, such as finding a side hustle
- Avoid applying for other types of credit
- Add a mortgage co-signer, such as your parents
- Consider purchasing your home with someone else, such as a brother, sister, or friend, and converting the home into two separate living quarters
Renting or Buying After Divorce
Whether you’re still in the throngs of separation or have closed that chapter of your life, renting your home first makes sense. There are a few reasons to take this route:
- You can take time to adjust to single life again
- You can consider your finances to determine if you can afford to buy
- You get a better feel of managing household expenses on your own to come up with a more accurate budget
- All the final papers can be filed and closed so you have a better picture of where you land asset and debt wise
- You can solidify your finances, set aside a down payment, and ease into the idea of ownership gradually
That said, if you are financially stable, have plenty of savings, and the divorce is going smoothly, it doesn’t hurt to speak to a real estate agent and review your options.