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Before short sale, consider all options

DEAR BENNY: I am upside down on my home, which I purchased before getting married, and my spouse has not been added to the loan. Can I do the following: (1) short sale and default on the balance without wrecking my spouse’s perfect credit? or (2) declare bankruptcy without wrecking my spouse’s perfect credit? –Hank

DEAR HANK: You indicate that your wife is not on the loan. Make sure that she is also not on the deed of trust (mortgage) that you signed. Since you bought the house before you got married, I suspect that she is completely out of the loop.

So, yes, you can proceed with either of your alternatives. But before you lose your home, have you tried all available options? Have you explored the various federal and state programs designed to save homes from foreclosure? Have you tried to modify your payments, although this is still a major problem throughout the country?

And, finally, have you offered to give the property back to your lender? This is known as a “deed in lieu” — i.e., a deed instead of a foreclosure. Many lenders have now started accepting deeds in lieu. They are beginning to realize that foreclosure costs are expensive, and if they are going to be stuck with the house — since many foreclosures end up with the bank owning the property anyway — why not save the foreclosure and legal expenses and just take back the property?

If you have time, my priority would be (1) try a short sale. Talk with a good real estate agent in your area and see what can be done; (2) try the deed in lieu approach; and (3) then, and only then, file for bankruptcy relief.

Please note, however, that when there is a short sale, many lenders are still trying to collect the deficiency. Often, they sell the balance of the note to a collection company for cents on the dollar, and that company begins to pursue you for the difference. But that’s the subject of another column.

However, because this column is general in nature, married readers should understand that when only one spouse signs the promissory note, the lender will require the nonsigning spouse to be on the deed of trust. Why? Because in order to foreclose on the property should the borrower go into default, the lender must be able to sell the property at a foreclosure sale. The deed of trust gives the lender (actually, the trustees selected by the lender) the power to sell the house. But if husband and wife own the property together, unless both sign the deed of trust, the property cannot be foreclosed upon.

So, if you are married, either avenue you pursue will impact on both your credit ratings.

DEAR BENNY: I have a hybrid mortgage that is fixed for the first five years at 4.25 percent and is tied to U.S. Treasury securities. The loan document notes that the index value is 2.1 and the margin is 2.75. The first change date on the loan is Dec. 1, 2011.

My loan documents say that on the first change date my interest rate could be as high as 9.25 percent or as low as 2.75 percent, with no more than a 2 percent increase in any given year thereafter.

Given the current fixed interest rates, is it advisable for me to refinance the loan now or continue to take advantage of the low rate I am paying for another year? What is the likelihood that the “index” could reach 6.5 percent in a year raising my interest rate to 9.25 percent? -Molda

DEAR MOLDA: That used to be a tough question, but with mortgage interest rates currently at the lowest in history, I think there is only one answer: refinance. You may actually be able to get a new rate similar to your current one.

However, if you plan to sell your house within the next year or two, then it probably does not pay to spend money on a refinance loan. There is no guarantee how long these low rates will be with us, so I suggest that you contact your mortgage lender to start the refinance process.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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