Divorce With One Spouse NOT on the Loan - How Does Short Sale Or Foreclosure Impact Credit?

By
Real Estate Agent with Keller Williams Realty Louisville East (502) 664-7827

Many times one of the divorcing spouses is NOT obligated or liable for the loan and therefore their credit may not be impacted. I'm referencing obligation to the lender, not obligation under the divorce agreement. Sometimes one of the spouses did not have had good enough credit while the other spouse had strong enough income and credit to qualify for the loan by himself or herself. Other cases could include a house and mortgage that was already in a spouse's name prior to the marriage. This is vital to know in a short sale situation.

How does a foreclosure or short sale affect the non-obligated spouse?

Important disclosure: The credit bureaus do not publish their secret formulas, so I cannot give a definitive answer to the question. I am not a lawyer, a mortgage underwriter, or a credit repair specialist. The above professionals should be consulted to get an authoritative answer. Laws and practices may also differ from state to state.

Okay, we have to get a little bit technical for a minute, to clarify often confusing concepts:

A loan has two primary parts

  1. A personal commitment to pay the loan back: This is evidenced by what is called the promissory note. Whoever is on the note gets the benefits of building up their credit when payments are made on time but they also get the disadvantage of damaging their credit if the payments are not made.
  2. An additional document that is called a mortgage. The mortgage pledges the house as security for the loan. The mortgage document permits the lender to go through legal process of seizing the house in a foreclosure if the loan payments are not paid. At the end of foreclosure process the lender sells the house to a new buyer to recover their investment.

You can be on the mortgage but not on the note. You may have pledged your house as security but not made a personal promise to pay.

If you are not on the note, then falling behind on payments, doing a short sale, or even losing the house to foreclosure may not hurt your credit at all.

How do you know if you signed the note?

  • Check your monthly mortgage statement. Is it addressed to you or only to the other co-owner.
  • Call your lender. Ask them if they report payment history on your credit report. If they won’t even talk to you, you’re probably not on the loan!
  • Run your credit separately from the co-owner. Does your mortgage even show up?
  • Check your closing documents. Is your name on the note?
  • Call the closing attorney who closed your loan. Ask them to interpret your closing documents.
  • Ask a mortgage broker to review and interpret your loan documents.
  • Ask a credit repair professional to review and interpret your loan documents.

Caution: Even if your credit report may not reflect foreclosure activity, you may still have to report on future loan applications that a house you owned had foreclosure activity.

I get these questions often in divorce and separation situations. In a divorce situation it is vital that your divorce attorney be made aware of who is obligated on the note. The divorce lawyer should be fluent in real estate issues, especially if the house cannot sell for enough to pay off the loan. A Realtor who specializes in short sales should also be consulted. Many divorce lawyers in the Louisville KY area call me to assist with a short sale, to rid the mortgage issue from the already stressful divorce negotiations.

The internet is full of conflicting information about the impact of foreclosure and short sale activity on your credit. Each case is specific and my intent here was to point you in the right direction to determine your situation.

Posted by

 

 

Dave Halpern, Realtor

The Dave Halpern Real Estate Group

Keller Williams Realty Louisville East

Website David.DavidHalpernRealtor.com

(502) 664-7827

 

 

View Dave Halpern's profile on LinkedIndave_halpern twitterhalperndave_facebookDave Halpern QR CodeLouisville Foreclosure Realtors Dave Halpern

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Topic:
Home Selling
Location:
Kentucky Jefferson County Louisville
Groups:
Short Sales
Short Sales Specialists
Short Sale REALTORS®
Sharing Information of Short Sales
Divorce and Real Estate
Tags:
real estate agent
credit
lender
divorce
loan
foreclosure
realator
mortgage
short sale
dh
divorce attorney
divorce lawyer

Post a Comment
Spam prevention
Spam prevention
Show All Comments
Rainmaker
550,645
The Scott Loper Team Bux-Mont Premier Properties
Keller Williams Real Estate - Montgomeryville - Lansdale, PA

Hi Dave,

Just one more example of how messy divorces can be.  Thanks for the information.

Lisa

May 22, 2011 02:12 AM #1
Rainmaker
153,060
Mary Lockman
Windermere Real Estate Methow Valley - Winthrop, WA
Methow Valley Real Estate

I can see why you are not afraid to guickly and easily learn new things.  Great information. our area does not have short sales for the most part ,but I try to stay informed just incase I find myself in one.

May 22, 2011 04:16 AM #2
Post a Comment
Spam prevention
Show All Comments

What's the reason you're reporting this blog entry?

Are you sure you want to report this blog entry as spam?

Rainmaker
525,554

Dave Halpern

Louisville Short Sale Expert
Ask me a question
*
*
*
*
Spam prevention

Additional Information