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How to salvage credit after ex-spouse's missteps

Benny Kass
Inman News

DEAR BENNY: I bought a home with my husband in 2002. We are both on the mortgage. When we got divorced in 2006, he bought me out and I signed over the quitclaim deed of the house to him.

He was to pay me $50,000, of which I've collected only $25,000. We continue to remain in contact for the sake of our son. I decided to leave my name on the mortgage loan because his income alone would not qualify him to refinance on his own.

He has been good in keeping up with the mortgage payment until six months ago when he defaulted on the home loan due to an unforeseen financial hardship. The house is upside down and three years of unpaid property taxes are due. I've made a big mistake in helping him and now my credit is ruined. The bank refused to remove me from the mortgage loan.

I know I wasn't very smart in handling this situation and now I'm paying the price. What can I do at this point to protect myself? I've gone on to purchase a home with my boyfriend. I don't want to drag him down with me, but I know he will be affected one way or another when it comes time for us to refinance our home. My credit score has always been 700-plus. Is there a way for me to get out of this with my credit intact? --Amie

DEAR AMIE: It will not be a consolation to you, but many former spouses are in the same boat. But we should never look back. There are many options available to you if your ex will cooperate. Both of you should first talk with the lender. I know this is often difficult, but most lenders have "remediation" departments that are created to try to resolve situations such as yours.

Next, look at all of the various state and federal government programs designed to assist homeowners like you. These programs can be located on the Internet, or by contacting your elected officials.

Explore such avenues as short sales, and deed-in-lieu of foreclosure. While either of these two programs will, unfortunately, impact your credit rating, it should not be as disastrous as filing for bankruptcy relief -- or letting the house go to foreclosure.

Ultimately, you may not have any alternative but to let the lender foreclose. Keep in mind, however, that legitimate lenders have so many foreclosed houses in their portfolio that they don't want any more foreclosures.

There are housing counseling services that can also try to assist you. Contact your local U.S. Housing and Urban Development Department office or your U.S. senator or congressman for more details.

DEAR BENNY: I live in Phoenix, Ariz., and found a great short-sale condo. The bank accepted my offer and I had a home inspection. Everything was going fine until the lender got a copy of the association accounts. These condos were sold at the height of the housing bubble, which means that a good number of them are "underwater." Nearly everything offered for sale in the complex is either a short sale or property foreclosed by the lender.

My lender backed out of the purchase and said nobody is going to lend money on these units under these circumstances. The association is about $350,000 underreserved. It's too bad because I already spent the money for an inspection. My Realtor also says that nearly all the condo complexes in Phoenix are either in or are going to be in that position. She tells me that when the association runs out of money, the pools will be empty, the grounds won't be maintained, etc.

My next foray into condo sales will begin with a reading of the association balance sheet and reserves balances.

I also own a condo in Florida where there are strict laws regarding funding reserves. I don't know what Arizona laws are, but you can't squeeze money where there is none to be had (special assessments, increased dues, etc.).

Do you have any advice in terms of what I should look for when shopping for a condo? Should I give up on buying a condo in Phoenix? --Patty

DEAR PATTY: I normally do not tell readers where the question came from. However, since you presented a comparison between Arizona and Florida laws, I thought it would be good material for my column.

I can't comment on the financial situation in Arizona, but can tell you that many communities throughout the country are facing similar situations. There are lots of delinquencies, which means that associations do not have enough money to properly operate the association. As a result, many areas find themselves in a downward spiral, with property values plummeting.

I also cannot confirm the laws in either state. However, quite recently several of the major secondary mortgage lenders -- Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) -- have imposed very strict reserve requirements in order for homebuyers to get a mortgage. For example, on Nov. 6, 2009, FHA issued a guidance letter requiring associations to have reserve accounts equal to at least 10 percent of the association's annual budget.