Ask Liz Weston

Get smart with your money

Real Estate

Q&A: When elderly parents are in financial trouble

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Dear Liz: My in-laws just informed us that they have gone through their retirement fund and soon won’t be able to pay their mortgage. They borrowed against the house they’ve lived in for 30 years and currently owe $325,000. They are devastated, so I am trying to figure out the best way for them to stay in their house in their final years, as they are both 73. They have about $300,000 in equity but do not want to sell. They are willing to sell the house to my wife and me at their current balance. We would make the payments and they remain in the house. When they pass, the house would be ours. They looked into a reverse mortgage but this would cover only the payments, not taxes, insurance or maintenance. What is the best way to do this? Do I get a loan and purchase outright? Do I contact their bank and see if I can assume their loan? Do they quit-claim the home to my wife and me? My wife and I can afford to do this, but we want to make the right financial decision.

Answer: Before you do anything, please consult a tax professional and an attorney with experience in estate and elder law.

It’s unlikely the lender will allow you to assume the loan, so you probably would need to set this up as a sale of the home with you and your wife obtaining a new mortgage.
But their plan to sell the house to you at a below-market value could create gift tax issues and could delay their eligibility for Medicaid, should they need help paying for nursing home care.

There are other risks to your in-laws. Your creditors could come after the home if you lose a lawsuit, for example. You could sell the home without their consent, and you would have a claim on the property if you and your wife split up.

Then there are the risks to you. You say you can afford to make the payments (and presumably pay the taxes, insurance and maintenance as well), but what happens if you lose a job or suffer another financial setback?

All of you need to understand the risks involved, and your alternatives, before proceeding.

A sale of the home or a reverse mortgage may well prove to be a better choice. A reverse mortgage wouldn’t completely eliminate their home costs, but would substantially lower them — whoever winds up paying the bill.

Q&A: How to escape a timeshare

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Dear Liz: How do I walk away from a timeshare? It’s paid off but we have yearly maintenance fees that are now $3,600 each year. This will be prohibitive in retirement, and it’s quite a burden now. The developer won’t let us give it back, and we can’t sell it because the resale companies are sharks that demand money upfront. Can they ruin our credit if we stop paying? Is there any way to protect ourselves?

Answer: If you stop paying your annual maintenance fees, your account can be turned over to a collection agency. That will trash your credit, and you could be sued.

Many people who buy timeshares don’t realize they’re making a lifetime commitment, said Brian Rogers, owner and operator of Timeshare Users Group. Even after any loans to buy the timeshare are paid off, owners owe maintenance fees on the property. Maintenance fees typically rise over time and may be supplemented by special assessments to repair or upgrade resorts as they age.

The good news is that you may be able to get out from under these fees by selling your timeshare, and you don’t have to use a resale company that charges an upfront fee. In fact, you shouldn’t, since those arrangements are frequently scams, Rogers said.

The amount you’re paying indicates that you own a timeshare at an upscale resort. (The average maintenance fee is closer to $800 a year, Rogers said.) If that’s the case, your timeshare may have some value, even if it’s only a tiny fraction of what you paid. Owners at less desirable resorts often find they can sell their timeshares for only $1, and may have to pay others to take the timeshares off their hands.

You can list your timeshare for sale at no or low cost on EBay, Craigslist, RedWeek or Timeshare Users Group, among other sites. To get some idea of what it’s worth, enter the name of the resort into EBay’s search engine and click on the “completed sales” box on the lower left side of the page. Timeshare Users Group and RedWeek offer additional advice on selling timeshares.

You also could consider renting out your timeshare, using those same sites. Many owners discover they can offset or even completely cover their maintenance fees through such rentals, Rogers said.

Q&A: An offer of “help”

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Dear Liz: My husband and I lost our home because of unemployment and being underwater (the value of the house was less than the mortgage). We now both are working full time and saving to buy another home. My father-in-law offered to help us by selling us a rental he owns and giving us a loan for $150,000. We also would have to get another loan of about $100,000.

In addition to paying him principal and interest, my father-in-law also wants us to pay the $900 rent he was getting for the home. Please advise us if you think this is a good arrangement. Is it fair for him to ask for the rental money too?

Answer: Of course not. He’s essentially asking you to pay for the property twice.

Most parents instinctively want to give their offspring a better deal than they would give a stranger. Your husband’s father is the exception — he’s asking you to agree to a deal that no stranger would consider.

Given this man’s inclination, you probably don’t want him as your banker or your landlord, let alone both. Keep saving your money and improving your credit scores so you can swing a home purchase on your own.

Q&A: Buyer’s remorse?

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Dear Liz: I am a single mom who has been renting a condo for seven years. My landlord decided to increase my rent and for two weeks I didn’t know by how much. In the meantime, I looked for a house so I would have a Plan B. I found a totally renovated foreclosure. By the time I found out what my new rental amount would be (just $46 a month more), my son and I had decided to get the house. I used my entire life’s savings of $25,000 as my down payment. Now I owe $62,000. Do you think I made the right decision to buy the house, or should I have stayed in the condo and continued renting? I am torn.

Answer: Of course you are. That’s a very common emotion after taking such a big step.

Tying up all your money in a single purchase or investment is never ideal, but what’s done is done. Focus now on rebuilding your savings (including your retirement savings) and keeping your house in good shape so that you don’t face expensive repairs down the road.

You’re unlikely to get any tax benefit from this home, given your enviably small mortgage, but you will build equity over time as you pay down the loan. You’ll quickly discover the many challenges and rewards of owning a home, which most people prefer to renting.

Q&A: Home equity loans, mortgages and retirement

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Dear Liz: I wish to add a little more information for the retired individual who had trouble getting approved for a home equity loan because he had no regular income (although he had plenty of assets). I’d suggest consulting a mortgage broker, not a bank. An independent broker is not captive to one set of policies. My broker suggested that I set up automatic withdrawals from my IRA to show that I had income in addition to Social Security. Once this was done and I met all the other credit requirements, I closed on a refinance in less than 30 days at a very good interest rate. Then, I discontinued my automatic withdrawals and went back to taking my funds as needed. I learned to use a qualified mortgage broker many years ago after a divorce and not having a job. I could not get a mortgage on my own, but my mortgage broker did and at very good terms. Each time I’ve used a broker, the process went smoothly and was stress free.

Answer: Many people don’t realize that lender policies differ quite a bit. In this case, mortgage buyers Fannie Mae and Freddie Mac have clarified that mortgage lenders can calculate a retiree’s income based on his or her assets, but not all lenders are willing to do the extra work these loans require.

People who are W-2 employees with solid income histories and great credit scores probably don’t need help finding a loan, because plenty of lenders will want to compete for their business. When your situation is outside the norm, however, a mortgage broker may be able to track down a lender when others balk. The National Assn. of Mortgage Brokers at http://www.namb.org offers referrals.

Q&A: Helping retired parents refinance

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Dear Liz: I am trying to help my retired parents refinance their home. Currently they are paying over 8% interest. (This loan should be illegal.) The problem is their credit score, which is around 536. They had a tax lien in 2004 (it has been paid off for over four years) and some minor credit card issues. The total card debt is less than $1,000. I see several bad footnotes on these cards. Some of the cards have a balance of less than $100. What is the best and fastest way to help them get the mortgage they deserve?

Answer: Your parents don’t have a single credit score. They each have their own scores. Mortgage lenders typically get FICO scores for each borrower from all three credit bureaus, for a total of six scores. Lenders look at the middle score for each person and typically base rates and terms on the lower of those two middle scores.

If that number is indeed 536, your parents have serious, recent credit problems. You may not think an unpaid credit card is a big deal, but it is to credit scoring formulas, which are designed to help lenders gauge a borrower’s risk of default. People with unpaid bills are far more likely to default on a new loan than people who pay their bills on time, and their respective credit scores reflect that reality. What people “deserve” isn’t a factor. How they handle their credit accounts is.

What you’re calling “bad footnotes” are likely records of late payments and perhaps charge-offs and collections activity. Those typically can’t be erased, but your parents can stop the ongoing damage to their credit by paying their bills on time and paying off any overdue bills to their credit card companies.

If the accounts have been sold to collectors, the process gets trickier. Paying off collections typically won’t help credit scores, but lenders usually want these accounts paid off before they will make a new loan. Your parents can try negotiating to have the collection accounts deleted in return for payment, but they won’t be able to erase the late payments and other negative marks reported by the original creditor.

Once they start handling their credit accounts responsibly, their credit scores will start to improve. The improvements will happen slowly, though, and they may well miss the opportunity to refinance at today’s low levels.