Q: We live in Nevada and are underwater with our mortgage like most folks in our area. Our daughter owns a home that is worth at least 50 percent less than what she paid for it.
Can she quit claim her house to us and can we then proceed with a loan modification? Are there any repercussions for her after a quit claim deed is recorded?
A: While your daughter is underwater with her mortgage, she may not be able to get a loan modification unless her financial circumstances have changed and she can no longer afford her mortgage payments.
While mortgage lenders have the ability to modify loans on the basis that the value of the home has gone down dramatically, it’s hard enough finding a lender that grants a permanent loan modification where a borrower has a financial hardship and his or her home value had nosedived.
But let’s say her financial circumstances have changed. The Home Affordable Mortgage Program (HAMP) is only available for primary residences. So, if your daughter gives the property to you through a quit claim deed, and you do not live in the property, you would not be able to do a loan modification under HAMP if you live in the home.
And even if you did live in the home, the loan would not be under your name. You would be unable to get a loan modification under the Obama HAMP program unless your daughter signed the documents and she maintained the home as her primary residence.
I should also mention that quit-claiming the deed to you doesn’t relieve your daughter of her obligation under the mortgage. The only way to get out from under the mortgage and the debt is to (a) pay it off, (b) do a short sale and get the lender to forgive the principal balance, (c) do a deed-in-lieu of foreclosure and have the lender take back the property and forgive any amount that may be owed and (d) foreclosure.
In some states, if a lender forecloses on a property, the lender’s only means of recovering money on the mortgage is from the sale of the property. If the lender does not get enough money, the lender would be out of luck and either couldn’t go after the borrower for the deficiency or would have go to court and get a deficiency judgment for the amount that may still be owed.
Recently, however, there were changes made to the HAMP program that might assist your daughter. Lenders are being encouraged to write off a portion of the principal so that the mortgage equals or comes close to the current value of the home. The extra principal will be set aside into a separate account and forgiven over a period of years. The lender would then refinance the loan on the new, lower amount (and hopefully at a lower interest rate).
The federal government is hoping that by writing down the principal of the loan, millions of Americans won’t walk away from their homes that are underwater.
As far as repercussions, you and your daughter should know that if you do a trial or permanent mortgage modification, short sale or foreclosure, your credit history will be damaged, and your credit score will fall anywhere from 50 to 150 points and in some cases more.
While the HAMP program was not intended to cause borrowers harm during the application and temporary loan modification process, many lenders have continued to report borrowers that came into the HAMP program with on-time payment records as anything but on-time.
If you want to try to buy the home from your daughter, I can’t imagine that the lender would willingly agree unless you pay off the loan entirely because you’re directly related. So, you’d be stuck buying it for the full amount that is owed, something you probably don’t want to do.
You can always ask if the lender is willing to accept a lesser amount for the home now if you buy the home from your daughter, and they might agree to it, but they may also decide that they would prefer to have the short sale go to an unrelated party.
I would think carefully about this plan and consult with a real estate attorney, who can provide assistance and help you think through your legal options. Your idea of freeing her from the burden of the home by using a quit claim deed won’t help her out.