Mortgages: May 2012 Archives

what happens if partner refuses to pay his half of the mortgage?

The lender will hold you each responsible for payment in full. That's the long and the short of it. You both agreed to the loan contract, and if it's not paid in full there will be all of the consequences for each of you: Hits to your credit, notice of default, foreclosure.

This is basically blackmail on the part of your partner, and a disturbing number of partnerships have this phenomenon. The only way I know of to recover the money is through the courts, which takes forever and costs more money. Even when you have a judgment, it can be difficult to actually get the money if they have taken certain steps to place it beyond your reach. Talk to an attorney right now, keep good records, and send everything Certified Mail.

Unfortunately, there are no method except time that I am aware of to repair the damage to your credit once it has been done. You just have to wait it out. For that reason, it is usually cost effective to loan your partner the money, even at zero percent interest.

What if you don't have the money for both halves of the payment? Well, that's a real question, and the answer is found in the article What Happens When You Can't Make Your Real Estate Loan Payment. This is not a good situation to be in. Talk to that attorney about liquidating your investment. It takes time and a lot of money if your partner doesn't want to.

What can you do to prevent this from happening? Pick a good partner that won't pull this nonsense. Spend the money to protect yourself up front with a partnership agreement. But that won't protect you if you didn't do it in advance, and the fact is that if your partner wants to be a problem personality, you really can't stop them in the short term. Not that it makes any difference to your pocketbook, but sometimes it's not intentional. People do fall on bad times for reasons not under their control.

Corporations are another step people take to protect themselves from this sort of thing, but that brings in all sorts of further problems. How the corporation qualifies for a loan is often a significant problem, and many times practically speaking, is insurmountable.

Borrowing money in partnership with someone else is something to be done with a lot of forethought and preparation, otherwise there's not much you can do when bad things happen.

Caveat Emptor

Original here

I've been aware of this scam for some time, but with a larger than normal number of people in foreclosure or otherwise at the end of their rope, it's probably past time to cover this. It is a pure scam throughout, but it's legal as far as I know.

I'm not going to go into more details than I can avoid. The universe knows there's enough people pulling this right now, but the bad guys already know about it, so let's even the level of illumination a bit. Here's the general way it works. The owners in default, and there's no way they're going to bring the loan current, as the lender can require once the Notice of Default hits. They do not have the requisite cash. Along comes a blackguard masquerading as a white knight, and makes the homeowner a proposition: Sign the property over to me, and I'll bring it current, rent it back to you long enough for you to get back on your feet. Pay the rent on time for two years, and I'll sell it back to you. There may even be a small amount of cash involved, as compensation for your equity "in case" you end up unable to purchase it back.

People desperate to stay in their property will agree. They think they'll be saving their equity, their kids won't have to change schools, and nobody will have to know they were in foreclosure. Of these, only the fact that the kids will be able to stay in their schools a little longer might be true.

Here's what happens: These scams are usually structured as a sale subject to existing deeds of trust, with all of the problems entailed in that, but not always. A signs the property over to B. B now owns it. In the absence of a contract for future activity, B can do whatever the heck they want to with the property. Usually, B will try to talk A out of demanding any actual written contract, and a verbal contract isn't worth the paper it's printed on. Without such a contract, what's preventing B from evicting A is essentially B's goodwill.

But with a contract or without, B is usually motivated to keep A in the property by the fact that they're going to charge A an above market rent - usually enough to pay not only the mortgage, but a significant monthly profit for B. I had a guy come to me a couple months ago who had accepted such an arrangement. His monthly payments had gone from $3100 to almost $4300. Where else is B going to get that kind of rent for properties that normally rent around $2000? And, of course, A is going to maintain the property. After all, they still think it's theirs.

If you can't make the payment now, let me ask you what makes you think you'll be able to afford a much higher payment? What makes you think you'll be able to pay it on time, as the contract, assuming there is one, demands in order to retain your right to re-purchase the property? It isn't going to happen. If you had that kind of spare cash, you would have brought the property current yourself. If you could afford the payment in the first place, you wouldn't be in this trouble. You probably wouldn't have been behind in the first place. But people will tell themselves all kinds of things, because "it's only temporary".

Now it's worth noting that for the ones of these structured as sales subject to existing deeds of trust, B is going to make a point of having some late payments on that mortgage. These hit A's credit rating. Chances of A being able to qualify for a better loan, that they can actually afford, when the two years are up? Zilch.

Even if they're not structured as sales subject to existing deeds of trust, the chances of A being able to qualify to buy the property back at the end of those two years are basically zero. There's going to be a late payment somewhere. "Sorry, but you're in default upon the contract terms." They can take the contract and a decent lawyer to court, and paint themselves as being a saint who kept A in the property, tried to give them the opportunity to buy it back, and was rewarded with default on the rental agreement and this lawsuit. Chances are that A ends up paying for B's lawyer, as well as their own. Even if A somehow manages to make all the rental payments on time and in full, they are now even more broke than before. No cash for closing costs, or anything else. Particularly in the sort of lending market we have now and expect to be having for the next several years, A is not going to qualify for the loan they need in order to repurchase the property.

What does the blackguard who pretends they're a white knight get out of all this? Well, they won't do it for properties without a good bit of equity. So for an investment of a few thousand dollars to bring the loan current, they get a property with 10% equity at a minimum, and usually more. They get a positive cash flow from having it rented above market for up to two years. And if A should somehow manage to leap all the hurdles to repurchase the property, that repurchase contract will give them back every penny they invested with cash to spare. And for the vast majority where A is unable to repurchase the property according to the terms of the contract, I'll bet that they get a good chunk of change, not only out of the equity built in to the deal, but also out of the differences between the market now and the market two years from now.

For being in denial, and unwilling to face the fact that they can no longer afford the property, A loses basically all of the equity they have built up. They would have lost some of it anyway, as it's not free to sell a property and in this market, you're unlikely to get top dollar for anything. But this ends up costing them more - tens of thousands more.

If you get into a situation where you're looking at losing the property, and someone pretending to be a white knight rides up and offers you this kind of deal, you're better off selling outright in pretty much every case. Yes, you've just lost the property. But you would have lost it anyway, together with basically every penny of equity if you accept one of these deals. How is that better than being responsible and realistic enough to accept the situation as it is, and sell on the regular market for the best deal you can get?

Caveat Emptor

Original article here

This is one of those things that trips up people to buy a house or refinance it: student loans.

First off, Form 1003, the Federal Uniform Residential Loan Application has the following relevant questions on page 4, among the "deadly thirteen"

a. Are there any outstanding judgments against you?

f. Are you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee?

One of the things they don't generally tell people about student loans is that a default of a federally guaranteed student loan stays with you for life, or at least until it is paid off in full. Unlike most defaulted debts, which are a black mark on your credit for 7 to 10 years, this one never goes away. With interest and penalties, the amount owed can be much larger than it was, even at the default point. Bankruptcy doesn't cure this debt. It is basically there forever. So don't default on your student loans. A yes answer on any of these questions turns a slam-dunk loan into a very questionable one. In this case, you can kiss any possibility of actually getting a VA loan or FHA loan funded, and first time buyer programs, which are provided via federal funds, are off limits as well. This includes both the Mortgage Credit Certificate as well as local first time buyer programs. Sometimes a conventional conforming or subprime lender will do a purchase money loan - but refinancing is right out unless you're going to pay the debt as part of escrow. With the federal government now owning Fannie and Freddie, I would anticipate the conventional conforming becoming even more difficult in the future, leaving subprime lending as your only option. Truthfully, it's been quite a while since I had someone in this position, so it might already have happened.

But most folks pretty much figure that if they're in default on student loans, they're not going to get much help from the feds or anyone associated with the feds. They might try to get around it, but they're not really surprised or bitter when they can't.

The thing that jumps out and surprises people is student loans not currently in "payment" status. You're not making payments on them now, so you don't tell the loan officer about them, and he doesn't take them into account in determining your debt to income ratio. Since the loan officer doesn't know about the student loans, they don't take them into account, and they say you qualify for a loan amount that you're not going to qualify for. Actually, this is pretty common even without student loans, but with them, it's practically ubiquitous.

Whether the loan is in payment status or not, it's a known debt. You're going to have to start making payments on it at some point. Sure, you might have a much larger income then, but that's not something you, I, or anyone else can guarantee. So what you're going to be paying in the future, when the loan enters payment status, is something that needs to be taken into account. You need to be able to afford the loan payment as well as all of your other debts, which most pointedly includes student loans.

So it doesn't matter that you're still in school, or the loan is in deferral or forbearance. The real estate lender is going to want to see documentation from the student loan lender as to exactly what that payment is anticipated to be. You might as well ask for it ahead of time, so you have it ready when it's needed. You should want to take it into account in figuring what you're able to afford, as well.

The last of the most common questions has to do with student loan consolidation. Since student loan consolidation usually extends the repayment period as well as fixing the interest rate, consolidating student loans has the effect of boosting what you can afford a portion of the way back up to what you could afford without them. The catch is that consolidation has got to be complete to get this benefit, a process that takes about six weeks. It's not something to try when you're in escrow; it's something you need to have done ahead of time if you want it to make the difference in getting your loan approved.

Most folks want to stretch to the limit to get the most house they possibly can. In fact, quite a few ask if there's any way they can extend what they qualify for. The general answer to that is "Only if interest rates drop or you start making more money that we can document." But in order to know how much you can really afford, you have to know not only the income, but what you're already obligated to pay via student loans as well as other credit payments.

Caveat Emptor

Original article here