Not only is foreclosure one of the most emotionally taxing events you’ll ever face, but it also leaves your credit rating in shambles. A damaged credit score makes qualifying for new housing, loans, credit cards, and even utilities much more difficult in the future. Depending on how you financed your home, your spouse may walk away from foreclosure with a clean credit history. Leaning on your spouse’s good credit after a foreclosure can help you avoid sky-high interest rates until your credit score has time to recover.
Legal Liability Determines Credit Damage
The individual who originally applied for mortgage financing and whose name appears on the loan documents is the one who is legally responsible for the mortgage payments–and the one whose credit will suffer in a foreclosure. If the home loan is in your name only, the mortgage appears on your credit report but not your spouse’s. This is true even if your spouse’s name appears on the home’s property deed, and he or she contributed to the mortgage payments. If the mortgage doesn’t appear on your spouse’s credit report, the foreclosure won’t either.
It isn’t uncommon for married couples to share a joint mortgage. When you apply for a joint mortgage, the lender takes both your income and your spouse’s into consideration. Although this allows you to qualify for a higher loan, it renders both of you legally liable for the mortgage payments. When a lender forecloses on a joint mortgage, the foreclosure record appears on both spouses’ credit reports.
Post-Foreclosure Lawsuits and Judgments
All too often, lenders cannot recoup the original loan balance by selling the foreclosed property. Unless you live in a state where non-recourse laws prevent lenders from pursuing you after a foreclosure, such as Arizona or California, you still owe any mortgage balance that remains after the sale of your home. Should the lender decide to sue–and many do–your credit report will reflect a civil judgment that damages your credit scores even further.
The Good News Is…
If your spouse wasn’t liable for the original mortgage, he or she likely isn’t accountable for the post-foreclosure judgment either. There are, however, exceptions to this rule. If you and your spouse live in a community property state, for example, state law dictates that both of you are equally responsible for debts either of you incurs during the marriage. In other words, your former lender can sue your spouse for the unpaid mortgage balance regardless of whether or not their name was on the original mortgage application. The resulting civil judgment can destroy your spouse’s credit–even if the foreclosure doesn’t appear on their credit report.
The degree to which any financial event impacts your credit will vary. A foreclosure, for example, generally lowers credit scores anywhere from 100 to 300 points. Higher credit scores are typically hit harder by foreclosure than lower scores.
If neither you nor your spouse walks away from the foreclosure with unharmed credit scores, that doesn’t mean that you’ll never again qualify for new credit cards or loans. Federal law requires the credit bureaus to delete a foreclosure from your credit reports after seven years.
As long as you and your spouse practice smart debt management practices and pay your creditors on time, you can expect your credit scores to increase considerably after the foreclosure record disappears.