When a couple divorces, they do not want to continue living together under the same roof. One party typically remains in the family home while the other moves elsewhere. The individual who moves out of the family home generally stops contributing to the mortgage payments. If the couple purchased the home together and the mortgage loan is in both names, both parties remain legally responsible for the mortgage payments. Even if the divorce decree states otherwise, creditors are not bound by the divorce decree. Should a foreclosure occur, it negatively affects both individuals.
Provided the mortgage appears in both spouses' names, the foreclosure record will appear on both individuals' credit reports. A foreclosure severely damages your credit score and can make it difficult to qualify for new credit in the future. The Fair Credit Reporting Act, which governs reporting periods for all credit entries, sets the reporting period for foreclosures at seven years. If your ex-spouse received the family home in the divorce and the mortgage is in both of your names, it is imperative that you stay in touch with your mortgage lender. If your ex-spouse stops making mortgage payments you can prevent foreclosure – and the credit damage that comes with it – by making the mortgage payments yourself.
The Federal National Mortgage Association, better known as “Fannie Mae,” notes that one way divorcing couples can prevent foreclosure is by selling the family home during the divorce. When a couple sells the home, they are no longer responsible for making the payments. This gives both parties greater financial freedom to make living arrangements that fit their new budgets. In addition, neither must worry about credit damage caused by the other party's inability to keep up with the mortgage payments. If selling the house isn't an option, the party who wishes to keep the house can refinance it. When you refinance a home into your own name, you remove your ex-spouse's liability for the loan. Should a foreclosure occur in the future, your ex-spouse's credit will not suffer.
Lawsuit After Foreclosure
Do not assume that once a foreclosure occurs the worst is over – that isn't always the case. If the sale proceeds from your foreclosed home do not cover the balance you owe, you are responsible for the difference. Unless you live in a state with specific laws prohibiting the practice, such as California, your mortgage lender can sue either you or your ex-spouse for the unpaid mortgage balance – even if the divorce decree notes that your ex-spouse was the one responsible for the loan payments.