DEAR BENNY: My husband and I recently applied for a home equity loan to help finance a new home we are building until we sell our current home. We applied at our local bank and it acknowledged that our home’s value, which is fully paid for, is more than adequate to cover the amount we applied for. The bank also noted that we have excellent credit and sufficient monthly income to support the payments (which it verified through direct deposits).
The bank requested a copy of our 2008 tax return, and I submitted pages 1 and 2 of our 1040. However, the bank said it also needs to see schedules B and D of our tax return. I questioned the bank on this, but the bank said it is a requirement. Is this standard practice, and is it lawful for the bank to check where our investments lie? It seems to be an invasion of privacy. –Joanne
DEAR JOANNE: Your question touched a raw nerve with me, as I have been complaining about this practice for years. Actually, you may have been lucky: Many lenders actually require you to sign Internal Revenue Service Form 4506, entitled "Request for Copy of Tax Return."
This enables mortgage lenders to invade your privacy even more, since with this form they can get some of your back tax returns, but if you want the loan you have to comply with their terms.
Readers who are asked to sign Form 4506 should read it carefully. The IRS provides a cautionary note: "If the tax return is being mailed to a third party (such as a mortgage company), ensure that you have filled in line 6 and line 7 before signing. Sign and date the form once you have filled in these lines. Completing these steps helps to protect your privacy."
Despite these clear instructions, many lenders just tell their potential borrower, "Just sign but don’t date it."
And unfortunately, the answer to your question is the same: If you want the loan, you must play their game. However, I understand why your lender wants to know your entire financial situation, including your investments.
For example, if you own stocks on margin, and those equities go down in value, you will be obligated to come up with some money to make up the loss. This may impact your financial ability to repay the mortgage loan.
My experience is that most borrowers will reluctantly provide their entire tax return to the potential lender. In fact, because most of us generally do not sign the copy we keep in our files, I have encountered lenders who insist that those copies be signed before the loan is finalized.
Yes, it’s a clear invasion of your privacy. But nowadays, lenders are lending-scarred — they don’t want to be audited by a federal (or state) agency, so they want assurances that they have carefully reviewed your entire portfolio.
DEAR BENNY: My income has declined about 65 percent in the last two years. I have used reserves to live on and get by, hoping things would get better, but they haven’t.
I’ve been using several credit cards since the early 1990s and have never been late or missed any payments. I had a credit score as high as 800-plus at one time, but now I don’t have the money to even make the minimum payments. I’m married and the cards are in my name only. My wife’s income or information was never used as a secondary on which to base my credit. …CONTINUED
If I miss payments or even default on the cards or even try to negotiate a settlement or pay off less than what’s owed, will that affect my wife’s credit score? –Tom
DEAR TOM: I am not an expert in credit ratings or scores, but if the credit cards are in your name only, I cannot see how this would impact your wife. However, if you both wanted to buy a house — or any other big-ticket item — where the lender determines that your wife’s income is not sufficient (or if the transaction requires both of you to sign promissory notes), then your credit standing would be considered and you may not be able to buy that item.
You may want to consider going to a nonprofit credit counseling agency to try to assist you in rehabilitating your credit. However, make sure the agency is legitimate. Call such groups as the Better Business Bureau in your area to get more details about the agency before you sign anything. And by no means should you have to pay anything up front before your counseling begins.
DEAR BENNY: My husband and I own a building consisting of 12 small offices and warehouse space. We rented all the offices except for the one my husband occupied for his business. Upon receiving each request to rent, I purchased a standard rental form and thought my husband had them complete it, but he did not.
Because the tenants were very nice people and they befriended him, he let them stay when they were having financial troubles and could not pay the rent. As things improved for them, they paid the rent regularly but have trouble paying the back rent, which now totals more than $100,000.
What can we do to collect this rent? I wanted to charge them interest to prompt faster repayment. If we do this, should I write the letter or should we get an attorney? We really can’t afford an attorney at this point, as all of my husband’s income from his suffering business is going toward the mortgage and upkeep of this building. We have a buyer and the sale is in the works at this moment. Do you have any suggestions? –Rebecca
DEAR REBECCA: You should get a lawyer. Try to convince the attorney to take your case on a contingency basis — which means that if he or she is successful, a portion of your recovery will be the legal fee. And even if you cannot find such an attorney, you really should take legal action as soon as possible.
But whether you can find a lawyer, you must determine what the applicable statute of limitations is. This means that after a specific period of time, which is determined by your state law, you can no longer file a lawsuit.
If you are selling your house and will not be barred by your state statute of limitations, then perhaps you can wait until you can use your sales proceeds for the litigation. Hopefully, your lease provides for attorney fees should you prevail.
Advice to consumers: First, make sure that you have a good lease. Don’t rely on forms. Have a local attorney prepare a lease that you can use for your tenants. …CONTINUED
Next, make sure it is completely filled out and signed by all parties. If the tenant is a corporation or a limited liability company, insist on obtaining a written personal guarantee from the prime owner of the company.
And finally, never — I repeat never — let the rent escalate more than a couple of months. The longer you wait, the harder it will be to collect. There is no cash register at the back of the courthouse; you may get a judgment but may not be able to collect. Worse, the tenant will file for bankruptcy relief, which may wipe out your claim for back rent.
DEAR BENNY: I have a rental property that I had purchased in 2005. I was going to hang onto the property and sell it a few years later, but since that time the real estate market has not been good.
I find myself in the same position as many others: that my property is now worth less that what is owed on it. Now I carry only a first mortgage on the property. I do not have a second mortgage or even a line of credit. In a previous article you stated that with only a first mortgage the option of asking the lender to take back the deed and cancel the mortgage would be a lot easier.
My question: What sort of risk to one’s credit rating does this have? I still have excellent credit but am unable to continue pulling out of savings to make the mortgage. Is there something that might also be able to help me convince my lender to take back the deed? –Yvonne
DEAR YVONNE: I am not familiar with how credit bureaus work. To my knowledge, however, when the lender takes back the deed — called a "deed in lieu of foreclosure" — it will have an impact on your credit standing. It won’t be as bad as if the property were foreclosed upon, but it will still affect you.
I also have absolutely no idea how banks work — some banks will accept the deed and others will not.
My suggestion: Try to talk with your lender to arrange a loan modification. Many lenders do not want to foreclose (or even take the house back) because they not only lose their mortgage but often end up owning the property. There are also a number of government programs that may be of assistance.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.
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