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Fiancee’s bankruptcy raises sticky issues

September 14, 2007

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When one spouse has recently filed for bankruptcy, it's sometimes best for the other spouse to apply for a mortgage in his or her name only.

Q: I am getting married on Thanksgiving Day. My credit score is very high, but my fiancee filed for bankruptcy several months ago and her score is still pretty low. We are planning to purchase a house next spring. How will her bankruptcy affect our chances of getting a mortgage together?

A: Most banks today aren't anxious to make loans to individuals or married couples with a recent bankruptcy on their record, especially because the housing market remains weak in many parts of the nation and foreclosures have skyrocketed. But I'm sure that the two of you eventually will be able to obtain a home loan, provided that you contact lots of lenders or work with a good mortgage broker.

However, it's important to note that banks usually charge a higher interest rate or fees to borrowers who have filed for bankruptcy in the past year or two. So, the larger issue here is whether you should apply for the home loan in your name only or whether the two of you should apply jointly.

Ask the lenders or mortgage brokers that you contact how your fiancee's bankruptcy filing will affect the loan application. Also ask for two written quotes - the first for the terms that the two of you would get by applying together, and the second for the terms that you alone could obtain if you personally applied in your (bankruptcy-free) name only.

If the terms would be the same, you should probably apply for the mortgage jointly. But if you would get a better financing package because your credit rating is higher than your fiancee's, you could apply for the loan by yourself and then put her name on the title to the home after the purchase is completed.

Bankruptcy laws are complicated. Your fiancee's name shouldn't go on title to the property - regardless of whether you file the application together, or in your name only - until the two of you have talked with an attorney to ensure that her current and previous creditors cannot place a lien on the new home in order to collect her unpaid debts.

Q.: What is a "classified" property tax?

A.: It's a tax that's based on how a property is used rather than how it is "zoned" by the county assessor or other government officials.

For example, if your single-family house sits on a parcel that has recently been rezoned to allow for the construction of a high-rise office building, you should be "classified" at the lower homeowners' rate instead of paying the higher tax bill that the development company might owe after its high-rise was completed.

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