October 15th 2020
When a couple owns real estate together and have decided to sell their home and live separate and apart, a separation agreement will be necessary. This is true whether the couple is married, common-law, or are partners in a short-term relationship. This article focuses on the importance of understanding the equity in your home, considers what issues might be covered in an agreement, and explores when a party should seek legal assistance for the purpose of having a separation agreement prepared.
To understand your rights on separation, it is important to understand the meaning of equity. When we consider home equity, what we generally mean is the value of the home that is left after subtracting any secured debt. For instance, if you own a home with a value of $450,000 and hold a mortgage with a balance of $350,000, you have $100,000 of equity in your home. For equal owners of real estate, the starting point is that equity is divided equally, meaning each party would receive $50,000. A separation agreement would specify the exact terms of the division of equity, which may or may not be equally divided in the circumstances. Speaking to a lawyer about those circumstances is strongly advised.
A separation agreement typically resolves all outstanding matters between the parties, including debt and other possessions. Parties often hold debt together, such as car loans and credit cards. There are other assets and possessions which may be jointly owned, such as bank accounts or furniture. Often, one or both parties are looking to make a home purchase of their own after separation. A lending institution will require that a separation agreement be signed before agreeing to finance any new purchase. This is because without a separation agreement, it is unclear what equity the borrower has, as well as what debt, spousal, or child support obligations might remain. Only with a separation agreement will a lender be able to determine whether someone leaving a relationship can afford the terms of a new mortgage.
The timing of when to discuss the terms of a separation agreement with your spouse can vary. Often parties will want to know the value of their home before speaking to a lawyer. A trusted real estate agent can provide an honest perspective on this. Keep in mind that if a contract for the sale of the home is signed before a separation agreement is finalized, the parties will still be required to sell their property. Unfortunately, the proceeds from the sale must remain in trust with the selling lawyer until the parties come to an agreement on the division of equity. It is therefore recommended that each party reach out to their own independent legal counsel as early as possible in the process of selling their home.
For individuals who are considering a separation, it is recommended to consult with a lawyer who has experience in the preparation and negotiation of separation agreements. A properly drafted separation agreement will provide you with confidence of knowing that what was agreed upon was fair to you in the circumstances. Do not hesitate to contact Liddiard Law today for your family consultation.