Divorce can reek havoc on more than just emotions and families. Credit is often just viewed as an inevitable destruction zone – but it doesn’t need to be as long as both parties learn to play nice in the sandbox. Knowledge is power and it is important that both divorcing clients understand some of the more common issues that face their credit when going through a divorce.
Mortgage payment is missed. Whether an oversight or intentional, when a mortgage payment is missed there are more repercussions than just a negative hit to the credit score.
A single 30 day late mortgage loan payment can cause a credit score to drop by as much as one hundred points.
- A single 30 day late mortgage loan payment may prevent you from obtaining mortgage financing from 12 months up to 24 months depending on the loan program and investor.
- Marital Home in Foreclosure Proceedings. Many times in a divorce situation there are financial struggles and often times the marital home is involved in foreclosure proceedings.
If foreclosure proceedings have already begun the best option and sometimes the only option is to contact the current lend-er/servicer to determine if there is a loan modification or alternative plan to salvage the marital home if this is desired. Once the foreclosure proceedings are underway, new traditional mortgage financing is very difficult if not impossible to obtain. Even if the foreclosure proceedings were resolved, the recent mortgage payment history stated above will be a factor in obtaining new financing.
Joint Marital Debt Retained Post Divorce. When it is currently not possible or not the best option to close out joint marital debt the court may order one party responsible for the full payment of specific debts. When this occurs, the debt is considered a “Contingent Liability” and for mortgage financing purposes, contingent liability is not typically included in the debt to income ratio for the party not responsible for the joint marital debt. But what happens if the responsible spouse makes a late payment on the joint obli-gation?
The credit score of both spouses will be affected negatively as both individuals are still liable to the creditor.
For mortgage underwriting purposes, if the debt was ordered to be paid solely by one party per the Marital Settlement Agreement, the payment history of the debt after the contingent liability was ordered may not be considered by the mortgage underwriter.
Contingent Liability guidelines are applicable to all joint marital debt including mortgage financing, auto loans, installment loans, credit cards, etc.
FREE Credit Reports
Many times, divorcing clients will provide their attorneys with a list of their existing debt; however, the safest way to make sure no debt is overlooked, it is advisable to obtain independent credit reports for both divorcing parties.
In 2003, Congress passed the Fair and Accurate Credit Transaction Act as a way to address identity theft. FACTA is an addendum to the Fair Credit Report Act.
Under the FACTA, consumers have the right to request one free copy of their credit report from all three bureaus: Experian, Equifax and TransUnion.
Congress also created a website where consumers can order all three reports in one place: www.annualcreditreport.com
Tip: Advise clients to maybe pull one bureau every 3-4 months as a way to monitor their credit for free on a constant basis.
It is always important to work with an experienced mortgage professional who specializes in working with divorcing clients. A Certified Divorce Lending Professional (CDLP) can help answer questions and provide excellent advice. To find a CDLP in your area, please click here.
This is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact an attorney or tax professional to obtain legal and tax advice. Interest rates and fees are estimates provided for informational purposes only, and are subject to market changes. This is not a commitment to lend. Rates change daily – call for current quotations.