Real Estate Home Mortgages/HELOC Responsibility
QUESTION: I'm in the middle of a very complex situation & am looking for any advice... My husband (now deceased almost 5 years) and I purchased a home several years ago. Because my credit was not good at that time & we were not married, I was not on the original mortgage or deed. After 3 years, the mortgage was refinanced & by that time we were married, but again my name was not on the mortgage. Another year after that, we applied for a HELOC for which I was a co-signer. At the time of refinance, we were told that a new deed would be filed with both names; however, after my husbands death I learned that no such deed had been filed. The explanation given was that because it was considered the "marital residence", there was no legal requirement & in the event of divorce, I was still entitled. The problem is, in the event of death, particularly when there's no will, the same is not necessarily the case. When the real estate market took a turn, the house was upside down. I abandoned the home and the house is now in foreclosure. I have been paying the HELOC so that it doesn't negatively effect my credit. I'm now being told that I am ineligible for a mortgage because the property associated with the HELOC is in foreclosure. Can I be held wholly financially responsible for the outstanding balance of the HELOC even if my name is not on the deed? I have an attorney to assist me in settling the estate, but I want to make sure I'm protecting my own interests relative to this property matter. I would greatly appreciate ANY advice or insight regarding how to manage this situation. Thank you.
ANSWER: It is likely that the HELOC lender is showing the mortgage in default primarily due to the first mortgage having filed for default. It is common for 2nd lien holders to file the default as soon as they are notified to help protect their interest in the property. You do have a very complex case since you are paying on the HELOC but have no interest in the property. The lender involved has 2 security instruments in play on this. First they have the deed to the property, second the note you signed for personal liability.
In your case- since the title work was not filed as described to you the bank is dealing with two very separate security instruments, meaning a negotiation may be the best way to resolve the matter. If your second mortgage is over and above the value of the home you have a stronger negotiating position. You could as the bank to rewrite the note of the HELOC as a line of credit not associated with real estate. In exchange they release the current HELOC from title to clear your credit of having a foreclosed property associated with it. The bank is more likely to accept if their lien position is weak. If they believe they will collect on the foreclosure they are less likely to negotiate.
Due to the complex nature of this situation I do recommend that you continue to work closely with your attorney. State specific laws are likely to affect you. Further, if the bank does agree to negotiate with you you will want to have the attorney ensure that your credit is freed up- agreement in writing- so you can accomplish the purpose of clearing your credit.
I hope this helps a little. The situation is deeper on the legal side than on the mortgage side so getting additional feedback from a real estate attorney may be helpful as well. Feel free to send reply with any follow up questions you have.
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QUESTION: I recognize not only the complexity of this matter, but that it is also more legal than mortgage related.
What you suggest makes sense... I'd already had the thought of making an attempt to somehow negotiate with the 2nd mortgage/HELOC holder since (1) they are not the 1st mortgage holder and (2) the value of the property is now well below the value of the combined mortgages. If I understand what you're suggesting, they may be more willing to come to a conclusion that something (via re-negotiation of terms) is potentially better than what they may get in a case of foreclosure and I made the decision to default on the loan. They could legally pursue me, but that would take time & there would be legal costs involved, etc. as opposed to a more amicable solution which would actually be somewhat mutually beneficial (more to them than me, though, since I will still be paying for something I have no interest in).
My follow-up questions would be - since the HELOC is currently secured by the property, what options are there to convert this to something not linked to the property (i.e., what type of loan would that be) and generally speaking, would some other type of collateral have to be offered as security?
Thank you, again, for your advice.
Your understanding of my suggestion is correct. The HELOC lender will be more motivated to work with you since their security is not good on the HELOC. The options for conversion would be to pay off the loan with a new loan generated either by the lender themselves or through another lender not associated with the current situation. Since you currently owe the lender who owns the HELOC their motivation will be higher regarding the refinance than any other party. so to clarify here are some potential solutions.
First- ask the current lender to refinance the HELOC to a signature loan, they release you from the note that is currently in default and agree to reflect this on credit.
Second option- get the funds to pay them off from another source, such as a credit card or loan from a different lender. Negotiated with the HELOC lender to pay them off provided they release all claims of the note being in default and clear up your credit. You could also try to negotiate a reduced payoff.
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