Q: My husband bought a house before we were married with a VA loan. It may soon go in foreclosure. My name is not on the loan. I want to buy a piece of land with only my name on the title. How will this affect me and my credit? Can anyone come and take anything of mine, or possibly the land if I do get it?
A: In general, the person that bears the brunt of any action by a lender against the borrower for the failure to pay a debt is only the borrower. If your husband is the only borrower on the original loan to the bank, you should not be personally responsible for the loan.
If the home is foreclosed on by the lender and the lender ends up with possession of the home, you and your husband would be affected by the eviction. However, your credit should not be affected, unless you applied with your husband on the loan or signed other documents to make yourself obligated under the loan terms.
However, the rules for borrowing are in flux at the moment and lenders may come to realize that one spouse has defaulted on a loan only to find out that the other spouse has the ability to get a new loan for a new home. To penalize borrowers that have gone into bankruptcy or have been foreclosed on their homes, some federal lending guidelines now bar any future loan for a period of time to that prospective borrower.
Will lender’s guidelines change to include the spouses of those individuals who defaulted on their loans? It’s too early to say. The key to buying the new place will be whether you can afford the new home on your income alone. It’s unlikely that you will be able to get a new loan for a new home and use your husband’s income to support the application. The key will be whether you alone can afford the mortgage payments, taxes, insurance and any required cash reserve.
If your assets are considered your own and you do not live in a state that could deem your assets marital assets of your spouse, your husband’s financial problems should not spill over into your own assets.
However, if your husband files for bankruptcy and you have used money or assets that belonged to your husband to buy other property in your name, you may find that the transfer of wealth from your husband to you could be subject to attack by creditors and the bankruptcy court.
While in general your question may deal only with the issue of whether you can go out and buy your own home, the cash you use for the purchase of that home could be suspect. If you and your husband have cash and you use that cash and your credit to buy a new home in your name alone, that new home purchase could be seen as a means of hiding assets from creditors. In states where deficiency judgments are a possibility you might be in trouble.
In many states, a lender can foreclose on a home. If the home is sold and the proceeds do not pay off the full amount of the debt, the lender is left with a deficiency. In some states that lender can sue the borrower to recover the amount still owed – the deficiency. If you use your husband’s assets to buy the home, you would be moving money from your husband’s accounts to your accounts and that transfer could be considered a fraud against the creditors that might have a claim on that money.
If you have your own income sources and your own savings that you can verify have been yours for some time, you should be able to buy the new home without these issues. But once you start co-mingling money, watch out. For the specifics, you should talk to an attorney now, before you make this sort of financial move.
March 19, 2009.