I’ve got an upside down mortgage and not-so-nice former spouse

Q:  My husband and I got divorced several years ago. The agreement was that both of us would stay on title to the house but I would make the house payments and live there. Of course,  like so many other people, we are now very upside-down on the value of the house. Also, I work for the county and with all the cutbacks my pay has gone down. Affording the house is becoming increasingly difficult.

I would like to short-sell the house. I called my ex-husband, now remarried, and told him what I would like to do. His response was that he wasn’t going to agree to anything, period. We have two loans on this house. The second mortgage was a line of credit we took out when we got divorced so I could give him cash in exchange for him agreeing to let me stay in the house and not sell it. At this point I don’t know what to do.

 A: Just based upon what little you’ve told me, I can tell you that a short sale makes the most financial sense for both of you.

There’s really only three ways to get out from under an upside-down mortgage.

You can take money out of your savings to pay the difference between what your home is now worth and what you owe.

If you’re willing to do that, you can simply sell the house.

Since few people are able or willing to write a big check to the bank, your only other choices are to short sell or allow the home to go into foreclosure.

Foreclosure carries some advantages, along with some big disadvantages.

In your case, you have a second mortgage that amounts to a huge problem.

Regular readers will recall that homeowners who meet certain qualifications and still have the original loan they used to purchase the property enjoy certain liability protections as a matter of law.

In other words, if you live in the home and have never refinanced, you likely have a loan commonly known as a purchase money loan. If so, a purchase money loan can’t sue you in the event you lose the property.

However, you mentioned that you took out the second mortgage in order to pay off your ex-husband.

Since you got that loan after you purchased the property, that loan is known as a recourse loan, meaning the bank can sue you for any money it loses after a foreclosure.

So, put another way, if your ex-hubby doesn’t cooperate in the sale of the house and you simply stop making payments, eventually the first mortgage will foreclose. Doing so will wipe out the second mortgage, and the financial institution will then sue you and your ex for whatever money it lost in the deal.

At that point, your only options will be to pay the judgment, file for bankruptcy or sit and watch as the bank goes after your salary, bank accounts and any assets you may own.

Under the new laws regarding short sales that went into effect last year, a short sale will avoid all of those problems.

However, a short sale would require your ex-husband to sign the closing papers, particularly the deed.

The hammer you have is if you’re willing to stop making payments and a foreclosure occurs, the bank will sue both of you and take their money from whomever it can.

Perhaps showing your ex-husband this column might help.

If, however, you can’t get your ex-spouse to think rationally about the problem and you’d rather not let it go into foreclosure and perhaps have to file for bankruptcy protection, there are some choices.

Depending upon exactly what your divorce’s settlement agreement says, your family law attorney may be able to go back into family law court and get a court ordering requiring your ex to participate in the sale.

If that’s not possible, the filing of a partition lawsuit will do the same thing, only the timeline will likely be much longer and the costs higher.

I wish I could give you an easy solution. But your ex-husband is simply taking the path of mutually assured destruction instead of thinking logically and in his best interest.

Hopefully, with time for a little reflection, he’ll come around.

Tim Jones is a real estate attorney in Fairfield. If you have any real estate questions you’d like to have answered in this column you can contact him at SolanoScene@TJones-Law.com.