Sometimes loans were made with only one spouse on the loan. What happens to the non-borrower spouse when a house goes into foreclosure or sells at a short sale?
If someone is not on the loan a short sale should not impact their credit or ability to obtain future loans. This should be verified with an attorney and a mortgage broker.
First of all, how did it happen that only one spouse is on the loan? Possibilities include;
- One spouse had better credit than the other and enough income to qualify for the loan.
- One spouse already owned the house and had a loan prior to getting married.
Common questions I hear when helping divorcing spouses avoid foreclosure are;
- Do the late payments impact the non-borrowing spouse’s credit?
- Does a foreclosure or short sale hurt the non-borrowing spouse’s ability to get a loan in the future?
If the non-borrowing spouse did not personally guarantee the loan, the good payments and the bad payments will not show up on his or her credit report. Some signs iclude; when the non borrowing spouse calls the lender for information they refuse to talk to him (let’s assume the wife is on the loan and the husband isn’t). The monthly mortgage bill would typically be addressed to the borrowing spouse only, although that is always a reliable indication.
Brief clarification: There are two loan documents, a “mortgage” and a “note”.
A mortgage pledges the house as security, meaning if the loan isn’t paid the lender can take the house in a foreclosure.
A note is signed by the borrower who is taking personal responsibility for paying the loan, sometimes referred to as the guarantor of the note.
The guarantor or the person who signed the benefits from good credit when the note is paid as agreed, and suffers from bad credit when the note is in arrears or gets foreclosed upon.
You can verify if you are on the loan by;
- Checking your credit reports to see who has mortgage payments reported
- Check your loan documents, or have a real estate lawyer check your loan documents
- Call your lender and ask them who’s on the loan
- Ask a mortgage broker to review both spouses credit reports to predict the impact on credit of the on-the-loan spouse and the not-on-the-loan spouse
If it’s a divorce situation it is especially important to confirm whose credit is on the line before property and debt distribution is finalized.