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Foreclosure may affect more than your credit score

Mar. 31, 2008 - 03:12PM   |   Last Updated: Mar. 31, 2008 - 03:12PM  |  

Marine spouse Rebecca Hartman asks a timely question: How would a home foreclosure or a "deed in lieu of foreclosure" affect her husband's career?

She's been trying to sell their home in a slumping housing market in Detroit since early last summer, before her husband re-entered the Marine Corps.

He has been at Camp Lejeune, N.C., since August, and they want to be together. They may try to rent out the Detroit house, although the market is flooded with rentals, too, Hartman said.

They have a Department of Veterans Affairs loan with a fixed rate of 5.5 percent, so they aren't in as bad a position as many others who have dangerous loans that started with low "teaser" rates but are now skyrocketing and costing hundreds of dollars more per month.

"We are not struggling because of financial irresponsibility," she said. "We rock on our bills. Our credit score is 730."

Credit scores over 700 are considered above average; scores under 600 are shaky.

But the Hartmans can't afford payments on both the Detroit house and the rental house they'll live in near Camp Lejeune.

He has arranged to rent a condo near the base, and she's trying to get a job. "I've got to go live with my husband," Hartman said.

"Hopefully, I'll get a good enough job that we can make payments on the house," she said. "If not, our condo rent payments come first. I have to … have a life with my husband, so unfortunately this house is the lowest on our list of priorities."

There is no definitive answer on whether a foreclosure or deed in lieu of foreclosure will affect a service member's career.

In a foreclosure process, the financial institution takes the borrower to court to repossess the property. With a deed in lieu of foreclosure, the financial institution enters into an agreement with the borrower to take back ownership of the property and releases the borrower from further financial obligations. This avoids having to go to court, which saves money for the lender.

"I'm concerned we'll see a lot of that this summer," an Army official said.

While troops who have subprime loans are not a widespread problem, the official said, "I am concerned that as folks rotate, they may have trouble selling their houses."

Financial issues sometimes surface when troops have trouble paying bills and debtors start calling their commanders, he said. They also show up during the security-clearance process and denial of clearances can affect careers.

"We take into consideration when a home goes into foreclosure because service members can't sell their homes" due to reassignment orders, said a service official familiar with the security-clearance process. "We understand they did not choose to move."

That doesn't give service members license to walk away from their homes when they get orders, she said. "No one is saying a foreclosure would not have an effect on a member's security clearances. However, we do consider the circumstances. What we look at is a pattern of behavior, regardless of the amount of debt.

"We look at whether you are being financially responsible, whether the condition was largely beyond your control and whether [you are making] a good-faith effort to repay the debt, or are you just ignoring the bills."

The officials noted that there are no set thresholds for debt amounts, credit scores or debt-to-income ratios.

Every case is unique. "If it were black and white, we wouldn't need people" to determine whether to grant security clearances, an official said.

Officials also allow service members to respond to credit reports, because the reports are sometimes inaccurate, debts have been paid, or there are extenuating circumstances.

Experts say you need to keep in contact with your financial institution if you're having problems or expect to have problems making your mortgage payments.

And with the options available on installations to get financial advice and assistance, you need to seek help early for problems. Being proactive is a big plus in your favor.

Aside from your career, a foreclosure or deed in lieu of foreclosure can have a serious impact on your finances, costing you money down the road.

"Next to bankruptcy, a foreclosure is about the worst thing you can do to your credit," said John Gannon, senior vice president of investor education for the Financial Industry Regulatory Authority.

Foreclosure, or a deed in lieu of foreclosure, affects your credit for seven years, Gannon said, so anyone contemplating such actions should understand the "significant, serious consequences," he said.

Obtaining credit will be more difficult, and companies may raise interest rates on credit cards and other variable loans that the borrower already has. Insurance rates may increase, too.

"And even though they are not contemplating buying another house, landlords do credit checks, too," Gannon said. That includes companies managing privatized military family housing.

Keith Kaufman, a personal financial manager who works with the military in California, said he has not seen anyone lose a security clearance because of a foreclosure.

With the California housing market tanking, he said, "we have so many service members going into foreclosures, or relinquishing their deeds in lieu of foreclosures. If all these people lost their security clearances, we would not have enough people to send over to Iraq.

"I'm working with a commander on PCS [permanent change-of-station] orders to go somewhere else who can't sell his house," he said. "What are we going to do, revoke [his] clearance because we're forcing him to move?"

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