Tuesday, July 16, 2013

Does Foreclosure Hurt Your Credit If Your Name Is on the Title But Not the Mortgage?

If you and your spouse want to buy a home but you either don't have good credit or lack a steady income, your spouse can apply for the loan in his/her name only. Your name can then be added to the home's title after the fact. If your spouse has good credit, he/she can qualify for better rates without your name being on the loan. You, of course, still legally "own" half of the home since your name is on the title. Everybody wins--unless, of course, the home gets foreclosed.

How Much Does Foreclosure Hurt Your Credit?

Foreclosure is disastrous for your credit report and scores. Even worse, the better your credit is when the foreclosure occurs, the more it will hurt you. You could lose 150 to 250 points after the foreclosure shows up on your credit report. If your credit was particularly good when you lost the home--as is sometimes the case with "walk-aways" --you may lose as many as 300 points.

The good news here, at least for you, is that because your name isn't on the loan, the foreclosure itself will
not appear on your credit report. Your name on the home's title doesn't give the lender the legal right to report the incident to your credit report or even pursue you for payment. You didn't sign the original loan documents agreeing to pay the debt or agreeing to let the bank foreclose on the home if payments suddenly stopped coming. Your spouse's credit gets trashed but, in most cases, your credit comes away from the foreclosure without a scratch.

Post-Foreclosure Collection: Are You Liable If Your Name Wasn't on the Mortgage Loan?

If the bank can sell your home for more than your spouse owed on the mortgage loan, that's the end of the story. If the home carried an upside down mortgage or a floundering real estate market makes the home harder to sell, the bank may be forced to sell the property for less than your spouse owes in back payments, fees and foreclosure costs. Unfortunately, most states give lenders the right to pursue borrowers for any remaining deficiency after a foreclosure.

The real trouble arises if you live in a community property state. Community property states give lenders the ability to pursue either spouse for one spouse's debt. In other words, the very fact that you're married makes you liable for unpaid debts--even if those debts are in your spouse's name only. While this doesn't make the foreclosure suddenly appear on your credit report, your credit may suffer when the bank attempts to collect any mortgage deficiency left over after the foreclosure sale.

(Read More: Community Property States and Defaulted Spousal Debt)

Lets look at the following example:

Five years ago, Joe and Mary bought a home. At the time they bought the home, Joe had excellent credit and a good job. Mary had a very limited credit history and was a stay-at-home mom. Because she lacked stable credit and an income, Joe purchased the home in his own name and put Mary's name on the title. Two years later, Joe lost his job. He couldn't keep up with the payments and the bank foreclosed on the home. Joe and Mary owed $150,000 on the home, but the bank sold the property for only $100,000.

After the foreclosure, Mary found steady employment that paid well so she and Joe switched roles. He now stays home and Mary works. In an effort to collect the $50,000 deficiency, the bank decided to sue. Because Joe and Mary live in a community property state, the bank decides to sue Mary instead of Joe. Even though Joe's name was on the mortgage and Mary's was not, Joe no longer earns an income that the bank can garnish. Mary does. After winning the lawsuit, the bank garnishes Mary's wages.

If your lender sues you and wins, you'll end up with a civil judgment for the foreclosure debt on your credit report. Civil judgments are public records that, like foreclosures, are extremely detrimental to your credit score.

The moral of the story here is that yes, a foreclosure can hurt your credit if your name isn't on the mortgage loan--but not directly. It all depends on your state's laws, your lender's policies and whether or not you and your spouse end up owing a mortgage deficiency after the foreclosure takes place.

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