Buying a property from a spouse & Short Sale

[Beau Benjamin]

I recently got married and upon the final details found out that my spouse's condo was behind on payments because she had accidentally let the insurance lapse and a pipe burst.

I was just beginning my real estate/rental journey, listening to pod casts regularly and reading forum posts.  I have some money saved up to put a down payment on my next property, but now I have all sorts of questions about my family's current predicament.  

Current options: 

1. Pay $12k for a loan modification in which my wife's lender will set the loan back to current.

2. Attempt a short sale (lots of questions coming below about this) in which I buy the property from my wife.

3. Let my wife's lender foreclose on the property.

We currently live at her property now, but have other options if we need a place to live.  I currently rent out my house that I owned prior to our marriage.

So #1 is kind of a crappy option because it will take my savings for my next rental property, plus I will have additional costs to repair the water damage.

-----

I'm interested in #2.  If I can buy the property on short sale, then my wife is free and clear of the debt and from a credit standpoint it is better (even if barely) than having a foreclosure.  

The stats are as such:

Loan owed - $150k

Property value - $133k

Property value with water damage - $121k

I would like to get a loan for $97k put down $24k (20%) and make a short sale offer.

Questions:

1. Who offers these type of loans?  I've called some traditional banks and it seems that nobody likes this plan.  Plus most state they'd have to get an exception for the husband/wife thing. (Note - Title/Loan is in my wife's name only since she owned it before we got married)

2. What else do I need to be aware of other than this may take a long time to complete?

3. Does this option make sense, or should I just use my money on a totally new rental property and utilize our ability to live elsewhere in the short term?

------

Questions for 3rd scenario (foreclosure)

1. If my wife's credit goes in the tank for a foreclosure, does it affect mine now that we are married?  Obviously I wish we could avoid this, but from a financial perspective, if I know I can use my great credit going forward and will be handling all financial items, do I care about using my savings to dig out of this hole, or just go forward with much easier loans, which I can get approved for with much less hassle.

[Jon Holdman]

Short sale between you and her isn't an option.  The lender won't approve it.  A short sale might be an option, just not to you.  Your wife would need to show hardship and lack of income and assets.  Is that the case?  Is that now the case for the two of you?

Sorry, but this story doesn't add up:

For one, insurance on a financed property doesn't accidentally lapse.  On a free and clear property, you might be able to ignore enough letters that the coverage would end.  But on a financed property the lender is the one paying the premiums from the escrows they collect each month.  So, unless you explicitly cancel your coverage, or your insurance company cancels you and you ignore those letters, the coverage isn't going to "accidentally" end.  Further, if this does happen, the lender is going to very quickly slap the property with a force-placed policy.  These are outrageously expensive, but you would have coverage.

Second, a burst pipe doesn't, by itself, result in being behind on payments.  You later imply the damage still isn't fixed, so it wasn't the costs of repairs that consumed all the money, resulting in nothing being left for the payments.

If she's behind on payments, your new wife's credit is already damaged.  A foreclosure or short sale with make it worse.  So those really aren't the best options.  And if she does have assets or income, they may come after her for the shortage.

Honestly 1) doesn't sound like a modification.  Rather, its just the back amount that's due to bring the loan current.  Do you have a hardship that would be leverage for a modification?  Or is this some sort of predatory loan?  Is this property under water? Loan modifications are notoriously difficult to get.  And lenders often string borrowers along for many months then deny the mod.

You sort of imply you found out about this after the wedding.  Hopefully that's not the case, and you knew the situation going on.  If so, I think 1) is the best option.  Get the situation behind you as cleanly and quickly as possible and move one.  If you didn't know about this, then, I'd really wonder what other skeletons are in the closet.  Not a good way to start a long term relationship.  Wedding night, "oh by the way, honey, I'm behind on the condo by $12K and the lender's going to foreclose.  And there's extensive water damage."  That would put a damper on things :-).