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posted: 9/6/2013 12:40 AM

Homeowners have loan protection after death or divorce of spouse

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Federal law prevents lenders from demanding that a mortgage be repaid in a lump sum after a divorce or the death of a spouse.

Q. My wife passed away a month ago after a long illness, but I would like to stay in our home because it has so many great memories and I can easily make the monthly payments from my Social Security benefits and pension. We bought our house 11 years ago with a loan that was in both of our names. If the bank finds out that my wife has passed, could it demand the house be sold or the loan balance be immediately paid in a lump sum?

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A. I'm sorry about the loss of your loved one. Though it's little consolation, you don't have to worry about the bank foreclosing on the loan or demanding that its outstanding balance be paid immediately.

Under the federal Garn-St. Germain Depository Institutions Regulatory Act of 1982, an institutional lender cannot demand that a mortgage be paid off in a lump sum simply because a spouse or other co-borrower dies. This means you will be OK as long you continue to make the monthly payments on the loan that you and your wife obtained more than a decade ago.

The bank can't force you to pay the mortgage off in a lump sum unless you fall behind on the payments, sell the property or refinance.

This same law applies to couples who get divorced and one of the spouses transfers interest in the family home to the other. The bank can't "call in" the outstanding balance of the mortgage in a lump sum unless the person who gets title to the house later defaults.

Q. Our daughter and son-in-law are trying to buy their first home. Although my wife and I don't have enough cash to give them a down payment, we have a perfect credit record and we are willing to cosign for their loan. Will cosigning help them very much? Also, if we cosign, can the lender force us to make our daughter's payment if she can't?

A. The answer to both of your questions is yes. Cosigning their loan application will indeed make it easier for them to get a mortgage, but the lender also can demand you step in and make the payments if your daughter and son-in-law do not.

When you cosign for a loan -- whether it's for a new car, furniture or a house -- you're basically transferring your own borrowing power to someone else. A lender might reject an application based solely on your daughter and son-in-law's income and credit history, but approve the loan if you're willing to cosign, because you have such a sterling credit record. But by cosigning the loan, you are agreeing to make the monthly mortgage payments if your daughter and son-in-law can't make them.

Many parents cosign for an offspring's loan without first thinking about the potential consequences. If your daughter or son-in-law unexpectedly gets laid off or fired, the bank can force you to make the mortgage payments. And if they eventually file for a divorce (as about 50 percent of married couples eventually do), the lender will have a legal right to insist you make the payments and perhaps even garnish your wages or foreclose on your own home.

Your daughter should be thankful you're willing to cosign, but consider such issues before you and your spouse sign on the dotted line.

Q. If we form the type of living trust you recently wrote about, and transferred our home and rental property into it, would we also have to get a special checking account for the trust and file a separate tax return for it?

A. No. The Internal Revenue Service does not require most homeowners and rental-property investors to file a separate tax return for their trusts. No special checking account is needed, either.

Most owners form an inexpensive living trust and put their home and other assets into it so that the property can pass quickly to their heirs instead of going through the long and costly probate process. The fact that no additional record-keeping is needed is a bonus.

Real estate trivia: September usually is the best month to get outdoor furniture and barbecues at their lowest price, experts say, as retailers try to dump their summer inventory of goods before ordering stuff like leaf blowers for the fall or holiday decorations for the winter.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.

2013, Cowles Syndicate Inc.

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