What Happens when a Joint Mortgage is in Default?

Married couples often opt for a joint mortgage to allow them to split the burden of meeting the demands of a home loan. This option is not only reserved for married couples, but most lenders will ask you have a formalized relationship with the co-borrower to prevent fall outs in the future. By applying jointly, two people can combine their incomes to create a more favorable debt to income ratio and afford a bigger mortgage. However, when you sign a joint mortgage contract, both parties will suffer if there is a default.

Whose Credit Is Used for Application?

Even though two incomes are combined on a joint mortgage, most applications only use one credit score in order to determine mortgage approval and an appropriate mortgage rate. Unfortunately, you do not often get to choose whose credit score will be considered. The applicant with the higher income will be the primary applicant for the mortgage, and this person's credit score will be the one that weighs most heavily on a joint mortgage application. For most couples, this is good news, since higher income people tend to have better credit scores owing to less debt.

Whose Credit Is Affected by Default?

Even though only one person's credit score is primarily used to determine a mortgage rate, once the loan is signed, both parties share equally in the responsibility of paying the mortgage. The mortgage company does not care which person signs the check each month or how much each is contributing. The company will only consider whether it received a full payment. This means, even if one person is paying half of the mortgage payments, the mortgage can slip into default without the other person's payments. Both parties will see the negative effect on their credit. The credit decreases will start with small increments as a payment is late. Then, if the debt goes into collections or delinquent status, there will be a bigger hit. Typically, a mortgage lender will notify you prior to declaring your debt in default. It is important to have this protection in your mortgage contract. It is also important to take note of this warning and act immediately to prevent the loan default.

Who Is Responsible for Default Penalties?

If the loan does go into default, both parties will be equally responsible to resolve the situation and pay the consequences. This is true even if the parties are no longer married or associated with each other. Depending on the language of the mortgage and laws of the state you live in, a court will determine who will be responsible for what payments. If you are still together and living in the home, you may file jointly to resolve the default through several different options.  A Chapter 13 bankruptcy allows you to restructure your payments in an attempt to prevent foreclosure; a Chapter 7 requires you liquidate the asset and pay off the loan in this manner. It is better to resolve the debt through bankruptcy and use the house to pay off your loan than allow the asset to be seized in a foreclosure.