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Thread: Home equity loan

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    Default Home equity loan

    I have a question for anyone who might have any idea... My ex husband and I bought a house about 1 1/2- 2 years ago. He is in the military and I was dancing. We then got a home equity loan. Now I was told that his name wouldn't be able to come off the loan until it is paid in full. He has asked about having his name removed but its not the biggest issue. What I am concerned for is if they do remove his name and I'm paying for this house {plus I don't have a W2 ie: no taxes taken out through my job} then will they try to take my house away and throw me in jail on tax evasion charges or something? I am so dense when it comes to this stuff. Anyone have any idea? If this is hard to read... let me know. I will try to put it into better explanations.

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    Default Re: Home equity loan

    Before I get too deep into commentary, please keep in mind that I'm not an accountant or an attorney but just a dancer like yourself. With that said ...

    From the point of view of the bank that wrote your original mortgage, and the financial institution which wrote the home equity loan (presumeably based on real estate values increasing over the past 1 1/2 years), they both have a lot of money 'at risk' with these loans, and they made the loans based on the premise that someone with a secure job and a reliable income would be making the monthly payments for the next 20-30 years. Since you have no tax history and apparently no reported income yourself, that someone was and continues to be your ex-husband.

    If you're really determined to get your ex-husband's name off of the mortgage and home equity loan, and continue them in your name only, about the only way that you're going to be able to do this is to get a 'straight' job with sufficient income to cover both monthly payments. Odds are that the bank and financial institution will NOT take the additional risk of taking your ex-husband's name off the existing mortgage and home equity loan and allow you to continue making payments on the same loans with the same interest rates while you're working as a dancer. Even if you were reporting your dancing income, paying the required estimated taxes, filing a self-employed tax return etc. the bank and financial institution would not consider a person with self-employed income to be an equally low credit risk to a person with a 'straight' job.

    It is possible that, while still working as a dancer, you could manage to get approval for a new 'stated income' mortgage. The 'stated income' loan will carry a higher down payment requirement and a higher interest rate because of the extra risk the financial institution will be taking by loaning money to a person without a 'straight' job with a regular paycheck. However, a new 'stated income' loan would allow you to pay off the existing mortgage and home equity loan and leave your name only on the new mortgage. But to actually do this, you'll probably be expected to cough up at least 20% of the current market value of the house as a good faith down payment. Part of this could come from any equity which has been built up versus the existing mortgage and home equity loan, but since you have only had the existing mortgage for 1 1/2 years plus extracted more equity via the home equity loan I'm assuming that between these two you basically owe almost as much as the market value of the house, thus you'll probably be expected to come up with that 20% down payment in cash.

    Now in order to avoid triggering an audit, you will need to have previously filed tax returns claiming enough income (and paying enough income taxes) to explain where the money for that $20,000 or $30,000 or $40,000 cash down payment originated, along with enough additional money to cover normal costs of living and payments on any other loans you might have i.e. a car loan. This will probably require that you report your income, pay your taxes, and set money aside for the next year or two in order for your newly created financial history to be plausible. Also, depending on exactly when your divorce was finalized, you may also be able to file an amended tax return for a previous year without having an impact on your ex-husband's taxes too much.

    If, as you imply, your situation is that you have a bunch of cash earnings from dancing set aside, cash earnings which were not reported and not taxed, and you attempt to hand $20,000+ to a financial institution as a down payment on a new 'stated income' loan in order to close out and remove your ex's name from the existing loans ... a 'stated income' loan for which you will be going on legal record via the loan application as stating that your average income for the last 1-2 years has been such and such an amount ... then in effect you are creating legal proof that you have committed tax evasion. The minute that a change of real estate title takes place to remove your ex's name from the property deed, state and IRS wheels will start to turn, which will very probably lead directly to your doorstep.

    To provide some doom and gloom, the worst case scenario is that you hand over the cash for a down payment on a new 'stated income' loan right now. An audit is triggered. The results of the audit are that the IRS 'estimates' that you earned but did not report say $30,000 per year for the last three years working as a dancer. The IRS then calculates that you AND YOUR EX-HUSBAND owe the IRS say an additional $30,000 in unpaid taxes plus say another $10,000 in penalties and interest (assuming that you filed joint tax returns while married). Your Ex-husband then takes you back to court using the 'Innocent Spouse' defense to avoid having to pay any of these taxes or penalties himself, even though they occurred at least partially while he was filing joint taxes with you. Thus you lose your house, you reopen a Pandora's Box in regard to your divorce settlement, and you also wind up owing the IRS say $30,000 out of future earnings (assuming the equity in your present house versus mortgage and equitly loan situation is say $10,000), plus being watched like a hawk to make sure that you pay the normal income taxes on future earnings in addition to the back taxes you will owe.

    My gut feeling here is that your best course of action under the circumstances might be to simply force the sale of this house, get clear of your ex-husband that way, start building your own financial history by reporting your income and paying your taxes, and then try to buy a different house on your own a couple of years down the road once a plausible financial history is well established.

    ~
    Last edited by Melonie; 04-05-2005 at 01:13 PM.

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    Default Re: Home equity loan

    Thank you so much for the information. Now in the event that we keep both of our names on the loan as well as the deed to the house {my ex and I had a very civil divorce} and he just expects me to pay the loan and use the house. Would that still be tax evasion if I pay the house taxes as well as state and he keeps his name as proof the house is being paid for by someone with a "straight" job. He doesn't want to take his name off the house {doesn't really mind having his name on the loan} because its building his credit plus we have a child together and he wouldn't take the house from me in any event. I know that was a huge jumble of words...hope it came out right. And basically what I'm asking is if everything stays the same, but he isn't the one actually paying, I am, does it matter? Or does it stay the same as its been?

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    Default Re: Home equity loan

    I'm sure that he doesn't mind continuing to have his name on the house for which you are making 100% of the monthly payments. That way 10 years from now, when you go to sell the house, he can claim 50% of the proceeds for himself. The fact that you have contributed a disproportional amount of money to the purchase of the house will essentially be irrelevant - if he's legally a co-owner he can claim an equal share regardless of the actual amount he contributed towards its purchase.

    Also, as co-owner, he could potentially pledge up to 50% of the total equity in the house towards a new home equity loan in his own name only. Should he then blow the money and go bankrupt on that loan, his creditors could then force the sale of your house and confiscate 50% of the proceeds to satisfy his unpaid debt.

    You could agree to continue the status-quo situation voluntarily, and in doing so avoid all of the difficulties associated with getting your ex's name removed from the loans and property deed. You'll also probably avoid raising any eyebrows with the IRS. But you're also assuming a huge risk that your ex can seriously screw you financially in the future, because legally speaking 50 cents of every dollar you continue to invest in the house which is listed in both of your names belongs to your ex not you ! I do understand that you have managed to conclude a divorce while still apparently remaining on amicable terms. However, it is naive to invest tens of thousands of dollars of your own money on the premise that those amicable terms will stay amicable forever.

    ~
    Last edited by Melonie; 04-05-2005 at 05:09 PM.

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    Default Re: Home equity loan

    Thats very true. I think I'm gridlocked as far as a decision goes. Can I ask him to sign some kind of right over to me before hand {is there such thing?}, stating he would do no such thing or would it just be wise to start from scratch? We are actually better friends then we were lovers, and I want to believe he will always be one of the "better human beings" out there, but you never know.

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    Featured Member scorpio's Avatar
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    Default Re: Home equity loan

    The only way to get him off the loan is to re-finance in your name. You can do this no problem if you have even marginal credit. Over 50% of loans today do not require you to prove income with w-2's or tax returns. However, if you currently have a very low rate, you may want to keep it as is.

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    Default Re: Home equity loan

    Can I ask him to sign some kind of right over to me before hand {is there such thing?}, stating he would do no such thing or would it just be wise to start from scratch?
    As long as a bank and financial institution holding a home equity loan are part of the deal, no there is no way that your ex could execute a 'quit claim' (i.e. legally relinquish his co-owner's rights to the house) even if he wanted to. As Scorp has posted, until you can get the existing mortgage bank and home equity loan company paid off and out of the picture, presumably by refinancing - i.e. taking out a new mortgage in your name only to pay off the old mortgage and home equity loan, and then refiling the property deed/title in your name plus the name of the new financial institution (with your ex's name removed) - your ex is going to remain as co-owner because it is HIS income which is backing the security of the existing mortgage and home equity loan. This means that he and/or his future creditors can lay claim to 50% of the equity in your house at any time until the existing mortgage and home equity loan are paid off. But this also means that, should you yourself fail to make the monthly payments, the existing mortgage bank and home equity loan company can hit on your husband to make good (which is the very reason they won't agree to taking your ex's name off the loans !).

    Scorp is also correct that you can probably locate a financial institution who will be willing to write a new mortgage in your name only to allow you to pay off the existing mortgage and home equity loan without your having to produce W2's or tax returns as proof of income. However, the interest you will have to pay on such a loan will very likely be higher than you are paying now. Also, it's very likely that this financial institution will require that you kick in additional cash to increase the equity (i.e. they like to see the home financed for no more than 80% of its current resale value). However, this would put you in the position I referred to in my original post in regard to potential red flags being waived, plus potentially going on record with proof you have committed tax evasion (i.e. signing the mortgage application which states that your income is X,000 dollars per year, while at the same time not filing a tax return declaring that X,000 dollars of income and paying taxes on that income).

    As I've already recommended, IMHO your best bet is to force the sale of the house to satisfy the existing mortgage bank and home equity loan company thus getting your ex out of the equation, start filing and paying your income taxes as required by law and start building a legitimate financial history of your own, and then in a couple of years buy another house in your own name based on that legitimate financial history that only you will have 'rights' to !

    ~
    Last edited by Melonie; 04-06-2005 at 01:51 AM.

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    Default Re: Home equity loan

    Thanks so much for the information! I will definitely look into selling and getting this loan taken care of. I appreciate it!

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    Default Re: Home equity loan

    This is a little of topic, but sort of related at the same time due to the "NO DOCS" discussion. It seems like I remember a few months back something about how the rules concerning "NO DOCS" loans were going to change so that they would no longer be available as personal loans. They would only be available as business loans.

    One of the reasons as I remember was to help prevent "money laundering"

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    Default Re: Home equity loan

    Actually, I believe that you're confusing a 'no doc' loan with a 'stated income' loan. By the common definition at least, a 'stated income' loan departs from a standard loan in the fact that it does not require proof of an income stream but merely the 'statement' of the borrower in regard to how much income stream he has. In exchange for the lack of a proven income stream, the lender charges a higher interest rate.

    On the other hand, by the common definition at least a 'no doc' loan, besides not requiring the borrower to prove their income stream, this type of loan also does not require the borrower to prove their current assets or bank/investment/retirement account balances either, or the fact that they have a job at all, or their creditworthiness, or even the source of their down payment money. Of course, in exchange for the near total lack of documentation, the lender will charge a much higher interest rate plus require a substantial down payment to insure that the total foreclosure equity will always be greater than the outstanding loan balance. Basically, the 'no doc' loan is just about one step away from borrowing from the 'Sicilian private lending institutions', with the only major differences being that the Sicilians don't require any equity other than your body parts and that the Sicilians charge a "slightly" higher interest rate LOL.

    The Patriot Act has empowered gov't agencies to 'sneak and peek' at the details of either 'stated income' or 'no doc' loans (i.e. a judge does not have to issue a warrant in advance and the agency doesn't have to inform the borrower that they are being investigated) should the gov't have reason for suspicion. But with a 'no doc' loan there isn't a lot of info to peek at other than the borrower's name and personal info, the amount borrowed, and the amount of the down payment. However, even this info is enough to cause trouble with the IRS I suppose, given that they could easily verify the reported income of the borrower against the amount of the down payment the borrower has plunked down and the amount of the monthly loan payments the borrower has promised to make for the next 20-30 years.

    ~
    Last edited by Melonie; 04-06-2005 at 05:02 PM.

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    Default Re: Home equity loan

    >>>Scorp is also correct that you can probably locate a financial institution who will be willing to write a new mortgage in your name only to allow you to pay off the existing mortgage and home equity loan without your having to produce W2's or tax returns as proof of income. However, the interest you will have to pay on such a loan will very likely be higher than you are paying now. Also, it's very likely that this financial institution will require that you kick in additional cash to increase the equity (i.e. they like to see the home financed for no more than 80% of its current resale value). However, this would put you in the position I referred to in my original post in regard to potential red flags being waived, plus potentially going on record with proof you have committed tax evasion (i.e. signing the mortgage application which states that your income is X,000 dollars per year, while at the same time not filing a tax return declaring that X,000 dollars of income and paying taxes on that income).<<<

    Wrong.

    100% stated loans are very common.

    Many lenders do not require an IRS 4506 to be filled out, and without this form, NO info goes to the IRS.

    As far as NO DOC loans going away-that is also wrong. In fact, they are becoming easier to get.

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    Default Re: Home equity loan

    Many lenders do not require an IRS 4506 to be filled out, and without this form, NO info goes to the IRS.
    True ... no info is automatically sent to the IRS. However, should the IRS or other gov't agency be given reason to go looking, whatever info which is included with the 'stated' or 'no doc' loan is certainly easily available to them ... including the application where the borrower has 'stated' how much their income is !

    As far as NO DOC loans going away-that is also wrong. In fact, they are becoming easier to get.
    Where did I say that 'no doc' loans would go away ? They are essentially a gold mind for the lender, since the lender is able to collect a higher than market interest rate over the life of the loan plus the lender has a guarantee (in the form of positive equity) that foreclosure will bring them in more $$$ than the value of the outstanding loan balance.

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    Default Re: Home equity loan

    Lender almost NEVER profit from forclosures. also, when you do a no doc loan, your appraisal will be highly scrutinised, since that is all the lender has to go on. If you are stretching value on an appraisal, it will be cut by the lender.

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    Lender almost NEVER profit from forclosures.
    This is particularly the case in regions where real estate market values are in decline ! But it's definitely NOT the case in 'hot' markets where real estate market values are rising rapidly. IMHO this is one of the reasons that 'no doc' or 'stated income' loans are much more popular and much more available in regions like Florida and California and Northeast cities - because lenders CAN profit from a foreclosure due to the value of the property having increased significantly versus the outstanding loan balance owed.

    also, when you do a no doc loan, your appraisal will be highly scrutinised, since that is all the lender has to go on. If you are stretching value on an appraisal, it will be cut by the lender
    Also absolutely true. Actually this goes hand in hand with the regional trend of rising versus steady versus falling real estate market values as well. The more 'down side risk' the greater the amount of scrutiny which will be focused on the appraised value of the property, whereas if local property values are rising at a rate of 15-25%+ per year nobody is all that concerned if the appraised value is off by 5-10%. However, with the 'real estate bubble' starting to draw mainstream press coverage, lenders are no longer safe to assume that real estate values will keep rising year after year and are demanding more 'accurate' appraisals to try and assure that they are not loaning out way more money than they can recoup in foreclosure.

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    Default Re: Home equity loan

    wrong on both counts. call any bank's REO officer and they will tell you they lose their ass on 99% of REO's. banks are in the finance business, NOT the real estate business.

    Also, NO lender will tolerate an appraisal that off by 5-10% At my lender, we cut almost 30% of the appraisals that we see.

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    Default Re: Home equity loan

    Wrong on both counts???

    I don't have any inside info on the apprasial thing so I can't argue that, but when it comes to the loosing their ass 99% of the time, no that does not seem plausible to me.

    Let's look at an example and do a little math.

    Once upon a time there was this "no-docs" buyer that wanted to buy a house on the water in Miami for lets say 300 thousand dollars, we will say that he lucked out and only had to put up 20%, that would be 60 thousand dollars, so day one the bank has at risk 240 thousand dollars. I don't know what the monthly payment would be but let's say it's 3 thousand dollars a month and this buyer makes those payments for 2 years before he defaults and the bank forcloses and takes the house. In those 2 years he paid the bank 72 thousand dollars, so added to the down payment the bank has gotten 132 thousand dollars. we will say the the house only appreciated 20% per year, that makes the house worth 420 thousand. To break even and not "loose their ass" as you put it, they only have to sell the house for 168 thousand dollars, gee I think that house would be on the market a whole minute or two at that price. It would probably go real quick if the price was just the original 300 thousand dollars, that would make them 132 thousand, a return of basically 33%, pretty good to most people and if when they sell it the next time it is to a "normal" buyer where they only get maybe 5% down that in itself is another 15 thousand dollars.

    Not getting the scheduled full amount and loosing their ass is two very different things.

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    Default Re: Home equity loan

    While I'm sure that Scorpio will eventually point out that there are two 'omissions' in your example, i.e. the time value of money/interest costs over the two year period, and the legal/accounting costs of foreclosure, I agree with you that in a lot of situations like your example the lender stands to make a GREAT DEAL OF PROFIT from a foreclosure.

    By his own admission, Scorpio works in the field of real estate financing. This leads to alternate conclusions that either the internals of real estate financing follow a very illogical set of rules and equations such that 420 + 60 - 240 = zero, or 'dere's a hole lotta DIS-in fo maaaation goin on roun heah'.

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    Default Re: Home equity loan

    I used to work for a foreclosure attorney and I set up the auctions and the evictions.

    When someone goes into foreclosure, the bidding STARTS at what the outstanding balance on the house is. If there are enough people bidding on a house, the bank can make more money, however, it very rarely ever happens that the bank makes 'hand over fist' on a foreclosure. In the 3 years I did this, I've rarely ever seen the bank make more than an extra $150,000-$200,000 on a property. The bank's main concern is unloading the house...as long as they get their original investment back, they really don't care what the house sells for. They are happier when they get more money for the house than it's outstanding balance as it off-sets the cost of foreclosure, attorney fees, and evictions...however, the longer they have the house...the more money they lose...so the sooner they get rid of it, even if they do not recover enough money to off-set the extra costs...they are fine.

    Which is why foreclosures can be such a great deal for investors or even homebuyers...or not. If someone over-finances their house (loan with a "questionable" 2nd mortgage), then one of the banks is going to lose money. It's all a part of the risks in loaning.
    Last edited by VenusGoddess; 04-13-2005 at 06:04 AM.

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    Default Re: Home equity loan

    As I said in my earlier post, their is a big differnce between not getting the full scheduled amount and loosing your ass. Maybe in the alternate universe of real estate lending not getting every last penny you are supposed to is considered loosing your ass, but to most people if you can walk away with your original investment or at least what you still owe then you didn't loose your ass.

    I did not talk about the foreclosure costs because I do not know how they are computed. Are they a fixed amount? The same for a house that is worth 100K or a million? Or are they a percentage? If so, a percent of what? The amount of the outstanding balance, the original loan or the present valur of the house?

    Let's say it is a percentage, 10% for example and it is of the current value. On our 420K house that would be 42k, add that to the 168K still outstanding and you have 210K to break even. I do still think that a house at 50% off unless it is sitting on a toxic waste dump is going to be snapped up quick, I wouldn't think it would be on the market more than a day or two, As VG said the banks don't normally make much but that is because the want to unload them as quick as possible and really only care to get out of them what they have invested and move on.

    Their are proabably plenty of realators that do a little speculation on the side that would buy them up because they knew that they could turn around and sell/flip them very quickly and make 100K-150K in say a month or two.

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    Default Re: Home equity loan

    You folks are forgetting something-Most forclosures DO NOT HAVE EQUITY! If they did, they would refi-cash out, or sell to ther parties. By the time the bank gets it, the equity is nearly gone. After listing, taxes, principal, etc, the banks do not profit. When they do find buyers, they usually sell at a discount.

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    Default Re: Home equity loan

    But what you are forgetting is all the money that the buyer paid the banl prior to the foreclosure, the 132K on the 300K house in my example. This may not be "equity" in the traditional sense but it is money that the bank has recieved none the less. If you take this into account then even if the house did not appreciate at all in value and if the bank sold the house at a discount to get a quick sale, say 225K to 250Kthey would still cover the outstanding balance on the loan and whatever costs were involved in the foreclosure.

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    Default Re: Home equity loan

    where do you think the bank got the money to lend in the first place? They have to pay interest on it too

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    Default Re: Home equity loan

    Honestly...after all is said and done, the banks DO NOT, really, make money on foreclosures.

    In most states, banks cannot begin foreclosure proceedings until non-payment of mortgage has gone to at least 4-5 months...and then LEGALLY it will take another 2-3 months to do the court proceedings...another month for the sale and another 2 weeks after that for evictions. So, while they may make a 'PROFIT' after the sale...it's really not. They may not have been paid ANYTHING for almost 7 months...like I've said before...MOST banks rarely make over $100,000 - $150,000 of what is owed on the property (MOST properties that go to foreclosure are also in need of some repair work...thus why MOST people will not bid THAT much on a foreclosure). In essance, they make $100,000-$150,000 on a property...but, they still had to pay interest on money they didn't get back...pay a lawyer to draft paperwork, go stand in front of a judge...if the lendee files an answer and knows how to "play the system" it'll drag out longer...

    It's not as simple as most people think.

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    Default Re: Home equity loan

    Yes I agree that it is not a simple process and that it takes time.

    Yes banks do pay interest on the deposits that then turn around and loan out but it is at a much lower rate. The best rate you are likely to get on a long term deposit these days is around 4% but one of these "no docs" loans they are likley to get twice that maybe more.

    I guess it all comes down to just what you consider "loosing your ass" which is what I questioned to begin with. I and I think most regular people probably think If you get back your original investment or at least walk away not oweing anything you may have not made the big profit you had wanted or were expecting but you also didn't loose your ass.

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    Featured Member scorpio's Avatar
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    Default Re: Home equity loan

    you still aren't getting it. Lenders have their own investors, which they get the money to lend from. Those investors usually sell to the feds (Fanni/freddy) or Wall street. lenders are lucky to make 1 point on a loan. They make it up as volume, but still, 9 times out of 10 they end up losing on a forclosure.

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