When couples separate, the jointly owned home is often one of the first issues that needs to be dealt with. Some parties will agree to both stay in the home until a sale or a buyout. This may be because of financial reasons such as not being able to afford their own place at that time, not having somewhere else to go, or staying for their children’s wellbeing. In other circumstances, one party will move out, whether to a family member’s home or to a rental property. Sometimes, people plan to buy a house.
While a new house may seem like a positive, fresh start, entering the real estate market when newly separated has several risks which need to be considered.
It is common for counsel to recommend that a party not buy a new home. This is because a party can be exposed to a range of liabilities when taking this step. There are scenarios in which a purchase is possible, but to truly understand if it is, there are at least four key considerations to make before signing an agreement of purchase and sale.
1. No refinancing without a signed separation agreement.
Typically, a bank or private lender will not give pre-approval or financing until there is a signed separation agreement. This is primarily because the lender needs to understand the potential buyer’s cash flow.
Separation can greatly impact a person’s monthly take-home income. For example, will the person looking for financing be paying or receiving child support? Will they be receiving or paying monthly or lump sum spousal support? Will the house be sold and therefore the person will be receiving funds? Does the person owe their spouse a payment to settle property and asset division for the wealth accumulated during the marriage, or another form of adjustment payment as a result of the relationship? All these items impact the person’s ability to buy a home. Without this information, the lender cannot assess the financial situation of the person applying for financing and cannot understand the ability to pay on an ongoing basis. A signed separation agreement gives the lender this breakdown and is therefore critical in this process.
2. No access to sale proceeds.
Some parties will agree to sell their home as a result of their separation. While doing so means there will be sale proceeds coming to each party which will often be used as a down payment for a new home, there is a large chance that those sale proceeds will not be released until there is a signed separation agreement. This is because if there are payments owed from one spouse to another in respect of retroactive support or a property settlement, sale proceeds are a guaranteed source from which those payments or adjustments can be made. Often, sale proceeds are released only once there is a signed separation agreement specifically outlining how the parties agree the proceeds will be distributed.
Where there is no such signed separation agreement, a party might purchase a house relying on using the sale proceeds from the jointly owned home to close the new purchase. However, this party might be unable to close on the new house because there is no agreement between the parties as to distribution of the sale proceeds, and the other party will not consent to certain distributions.
3. Potential losses and lawsuit for not being able to close a sale.
Many recently separated individuals think there is minimal risk in putting an offer on a new house, especially if the closing date is months down the road. However, finalizing a separation agreement takes time. The parties may need to discuss parenting terms. Financial disclosure such as income, assets, and debts must be collected and disclosed. Property needs to be valued and divided. Support needs to be calculated. A closing date can creep up quickly.
If there is no signed separation agreement well in advance of a closing date, there is no buffer to allow for transfers to happen, payments to be made, and financing to be secured. Without this buffer, a purchasing party will not be able to close on the real estate purchase. If the seller cannot extend the closing date, the purchasing party may need to back out of the sale.
Typically, where the transaction does not close, the purchaser’s deposit will be lost. There is also a risk of the seller suing for damages resulting from the sale falling through. The extent of damages is unpredictable, as it all depends on whether the seller can now resell the property, for how much, how soon after the anticipated closing, etc. The purchasing party is left without a new home, no deposit funds, and with potential costs or a lawsuit on the table.
4. Ongoing liabilities to the existing home with partner.
Even if purchasing a new home after separation is successful, the jointly owned home with the ex-partner may still be in the picture, meaning that the carrying costs associated with that home still exist. While the person remaining in the home is typically responsible for utility costs and general household expenses, the mortgage, property taxes, and home insurance costs continue to be a joint liability.
If the party remaining in the jointly owned home is unable to pay these expenses, or refuses to do so, then the party who has left the home is impacted. This party either does not cover these expenses, which affects their credit score and potentially brings with it other penalties, or covers these expenses, adding significant financial burdens on top of new home expenses.
It is understandable why people do not want to stay in the same home after separating. It can be emotional, stressful, and difficult for all living under that one roof. It can be tempting to buy a new home, but doing so can cause more strain and problems than relief and joy in the immediate future. Thought and consideration must be given before taking any big steps.
About the author
Olivia Koneval-Brown is a lawyer at Mann Lawyers, practicing in the area of family law. She helps clients with various matters including cohabitation agreements and marriage contracts, custody and access issues, child and spousal support, separation agreements, and property division.
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