Senior Citizens Handbook - Your Rights as a Homeowner

Senior Citizens Handbook - Your Rights as a Homeowner

Last updated: March 2009

(Chapter 6 Section 2 of Senior Citizens Handbook)

Refinancing
Predatory Loans
Foreclosure Rescue Scams
Reverse Mortgages
Mortgage Foreclosure
Tax Sale
Equitable Indemnity
Real Estate Tax Deferral
Other Tax Advantages 

For most people, a home is their most valuable asset. The longer you have lived in your home, the more you have invested in it and the more valuable it has become. As you pay on a mortgage, the equity in your home grows. In many areas of the country, the value of a home has appreciated as the surrounding areas have been developed. Until recently, inflation, which is always present in our economy, constantly causes the dollar value of a home to increase. Starting in 2007, however, home prices in many areas of the country declined substantially, but hopefully home price appreciation will resume soon. This section is about protecting the equity you have in your home.

Refinancing

The Cost of Refinancing

There are many reasons why people decide to refinance their homes.
Examples: The need to reduce monthly loan installment payments; the need for cash for home repairs, paying off back taxes or other debts, and obtaining a lower interest rate.

No matter the reason for refinancing, the initial costs of the transaction are always substantial, even if the lender makes it seem like these charges are few, if any. In the highly lucrative credit market, lenders have developed some extremely creative ways of hiding these costs.
Examples: Refinancing costs may include origination fees or “points,” document preparation fees, processing fees, discount fees, credit life/disability insurance, referral or broker fees.

Moreover, you will pay the large majority of the interest during the early years of the payments. Most of the loan’s principal amount of the loan is not paid until the later years of the installment payments.

Deciding Whether to Refinance

Before you decide to refinance, you should carefully weigh the costs of refinancing against the savings from it over the period of time you intend to pay on the loan (i.e., before selling or otherwise paying off the principal).

You should also consider whether there may be alternatives to refinancing. Consider other options such as a property tax deferral or other tax relief discussed later in this Section. If you need home repairs, investigate whether your community has other funds to grant to you or to loan to you, such as weatherization programs or Community Development Block Grants, or other subsidy programs from city, county or neighborhood housing services.

Predatory Mortgage Lending Abuses

Understanding Sub-Prime Loans and Why They May Be Predatory

Elderly homeowners are attractive targets for unscrupulous mortgage lenders and brokers who would “skim off ” the equity long term homeowners have built up in their homes.

In the 1980s and 1990s, federal deregulation of the banking industry and changes in the income tax laws gave rise to a lucrative home lending market known as subprime lending, involving second mortgages and refinanced mortgages. Before that, most home mortgages were new purchase money mortgages.

While most lenders are up front and honest, many see an opportunity for easy money. Some lenders have developed aggressive marketing strategies including hard sell telephone calls or soft sell TV ads with retired professional sports heroes. These ads explain how easy it is to get rid of creditors and simplify your life with one combined payment which is lower than the total of all of your present monthly payments put together. These marketing campaigns are very calculated with well chosen words that often hide the long term costs. Indeed, there are some companies whose only job is to sign homeowners up for loans. Within days, these companies then transfer the mortgages to other lenders who collect the payments.

The credit industry grades potential borrowers according to their credit histories as A, B and C. If you have an A or A+ credit rating, you are considered a good credit risk (eligible for “prime” loans, with more consumer-friendly terms.) Lenders regard those with no credit history or a poor credit history as riskier and eligible for loans with terms that are less than prime (hence the term sub-prime.)

“Sub-prime loans” are loans made to applicants with less than a good credit rating. These loans often have higher interest rates, higher points and higher fees than prime loans.

There are many legitimate lenders who offer sub-prime loans. They charge higher than normal rates for their loans based on the actual credit risk of the borrower. They provide an important service for low-income seniors who might otherwise be locked out of the marketplace.

But many sub-prime lenders and their employees and brokers use unethical practices to charge additional and higher fees and costs than necessary, given the credit risk of the borrower.

A “Predatory Loan” is one in which the lender imposes excessive fees and rates that are not justified by the credit risk of the borrower. This type of loan may also impose unfair and abusive terms and charges, and often does not take into account the borrower’s ability to repay the loan. A predatory lender will target the economically vulnerable, including senior citizens and minority persons.

How People Can Get Duped into Predatory Loans

There are various ways consumers can be duped into predatory loans. One way is through dishonest home improvement contractors. See the section in Chapter 7 of this Handbook titled “Your Rights as a Consumer.” Other ways include debt consolidation, home refinancing and so-called foreclosure rescue fraud.

Like everyone, seniors worry about debt. Debt can take many forms, but most often, it is from credit cards or other consumer debt, medical bills and property taxes. Predatory lenders may make a phone call or mail an invitation to homeowners to borrow money against their homes. According to AARP, 75% of homeowners age 50 and over receive such offers.

The first tactic is to dangle out the bait.
A typical pitch: "Slash your monthly payments! Strapped by high interest credit cards and debt? A loan from us could save you hundreds in monthly expenses and still leave you with extra cash!"

But even though monthly payments may be lower, they do not tell you that you will wind up paying more over the long run and for a much longer period of time. A common loan period for a home equity loan is 15 years. They will tell you that home loans have lower interest rates than most credit cards or other consumer loans. Then they tell you that home equity loans are tax deductible, whereas other loans are not. And then, they clinch it when they encourage you to “consolidate all your debts into one low monthly payment with a home equity loan.”

Advocacy Tip
You should be extremely cautious about turning car payments, medical bills or credit card debt into a secured mortgage lien against your home.

But what the lenders and brokers do not tell you is that you are turning loans which are completely unsecured into a loan which is secured by your most valuable possession, your home. If you default on unsecured credit card debt, the creditor cannot as easily foreclose on your home, but if you default on a home equity loan secured by a mortgage, your lender can foreclose. And of course, if your creditor is a predatory lender, you will not be told about all of the predatory practices it readily will use against you.

Many predatory lenders who are willing to give you a home improvement loan or a debt consolidation loan will not take a second mortgage. They will require that you refinance your original purchase money mortgage, even if your original loan was at a lower rate. They try to convince you that it is a good idea because you will “have only one monthly payment.”

Predatory Lending Practices

You should always try avoiding loans that contain predatory loan terms. Descriptions of some common features of predatory loans follow:

High Loan Origination Fees
These are the “points” a lender charges to make the loan. One point equals one percent of the loan amount. Regardless of your credit history or credit risk, the lender may charge an origination fee totaling as much as 15-20% of the loan amount.
Example: If you borrow $50,000 from a lender who charges 18 points, you will pay $9,000 just for the loan origination fee.

Charging Bogus or Junk Fees
You might get charged fees for which no services were rendered, such as “courier fees,” “wire transfers” or “referral fees.”

Lending to People Who Cannot Afford to Repay
Predatory lenders make high interest loans to persons who, considering their current and expected income, current obligations, employment status and other financial resources, cannot afford the monthly payments.

Mortgage Broker Kickbacks
These are charges to pay a broker for steering you to a high rate lender. The mortgage broker holds himself out as your advocate to help you find the best available loan, but you are paying a large fee to the broker. The broker may get an additional bonus directly or indirectly from the lender for bringing in a high rate loan, often described as a "yield spread premium."

Balloon Payments
The loan is structured so that at the end of a shortened period of time, say 3 or 5 years, after making payments that cover little more than accruing interest, the entire amount comes due. You may be forced to refinance again for an additional term with all the attendant refinancing costs.

Negative or Non-amortizing Loans
This describes loans where the payments are not enough to cover the accruing monthly interest, causing the principal to increase each month. There is often a balloon payment at the end of the loan, which is higher than the amount originally borrowed.

Padded Closing Costs
The costs of settlement for the loan are often increased above the actual cost of the services. Often, there are little or no services provided for these charges.

Padded Recording Fees
Some lenders may actually charge for governmental recording fees in excess of the amount which is set by law.

Credit Insurance Packing
Some lenders are connected to insurance companies and will try to sell you credit life insurance, credit disability insurance and employment insurance. These policies are usually overpriced, since about 50% or more of the premium goes for the seller’s commission. The insurance costs are included in the amount financed for which they charge interest.

Mandatory Arbitration Clauses
The lender may insert a clause in the loan documents which forces the homeowner to resolve all disputes in front of an arbitrator chosen by the lender. The homeowner gives up his or her right to seek redress in court for any wrongs committed in the making of the loan. The arbitrator, who has an interest in the repeat business with the lender, gets a fee for his services. There are pending legislative proposals to try to curb arbitration abuses.

Loan Flipping
This is a practice involving repeated refinancing by rolling the old loan into a new loan instead of making a second separate smaller loan. The new loan is designed to pay off the previous loan and finance the fees and costs of the new loan. The term of repayment is repeatedly extended through each refinance, and the loan balance is often increased. This results in more interest being paid over the long term and a reduction in the homeowner’s equity in the home.

Refinancing Unsecured Debt
This involves consolidating credit card debt and other debt with no collateral into a loan secured by a mortgage on your home. In addition to your original debt, you now owe all of the closing costs and other fees associated with getting a home equity loan.

Paying Off a Low Interest Mortgage With a High Interest Mortgage
If you seek cash from a home equity loan, a predatory lender may insist that the current mortgage be paid off with the new higher interest loan.
Example: You had a purchase money mortgage loan at 8% interest. When you refinance, in addition to giving you cash, the lender lends you money to pay off the original loan, but the new loan is at 12%.

Excessive Prepayment Penalties
These are charges which kick in only if you pay off the loan early. To avoid these prepayment charges, you may be inclined to stay with your high interest rate loan instead of getting a lower interest rate loan.

Failing to Advise You of Your Right of Rescission
Under the federal Truth in Lending Act, you have 3 days (excluding Sunday) to cancel the loan after you sign. Although required by law to do so, some lenders will fail to inform you at closing that you have this right.

Bait and Switch
This is where the lender offers one set of loan terms when you apply for the loan, then pressures you to accept higher fees and charges when the papers are signed, threatening to cancel or postpone the transaction unless the papers are signed that day.

What to Do if You Have Been Victimized by a Predatory Loan

If you have been harmed by a predatory lender, you should see an attorney. The attorney can review a number of laws to determine whether you have any claims for damages against the lender or defenses to any claims the lender brings against you. These laws are discussed below.

The High Risk Home Loan Act

This Illinois law became effective in January, 2004. It requires lenders to do certain things and refrain from other things when making “high risk” home refinances. (This law does not apply to loans for the purchase of a residence.)

A home loan is considered “high risk” depending on the size of the annual percentage rate (interest rate). For a first mortgage to qualify as “high risk,” the interest rate must exceed 6% of the treasury security rate. For a junior mortgage to qualify as “high risk,” the interest rate must exceed 8% of that rate. The loan can also qualify as “high risk” if the total points and fees exceed the greater of 5% of the total loan amount or $800 (the latter figure may change every year).

It may be best to have an attorney determine whether the loan qualifies as a high risk loan. If it does, the statute:

  • Requires a lender to verify your ability to repay and to advise you of an independent counseling and education program called a “Mortgage Awareness Program”;
  • Limits prepayment penalties and late fees;
  • Prohibits the simultaneous financing of credit insurance, points and fees in excess of 6% of the total loan amount;
  • Prohibits direct payment to contractors for financing of home improvements;
  • Prohibits loans that exceed the home owner’s equity in the home;
  • Prohibits loans with terms where the regular periodic payments are not enough to cover the monthly interest due;
  • Requires a notice that advises you that signing a loan application does not bind you to going through with the loan, and that you should shop around;
  • Requires a notice in cases of default that explains the nature of the default and ways that you might cure the default.

If a lender intentionally violates this law, it has automatically violated another Illinois law called the Illinois Consumer Fraud and Deceptive Practices Act. As a homeowner injured by the violation of the High Risk Home Loan Act, you can bring a lawsuit against the lender for damages under those Acts. You may also be able to use these laws as a defense to a lawsuit filed against you to foreclose on your mortgage.

Other Laws to Use Against Predatory Lending

The Home Ownership Equity Protection Act (HOEPA)
This law is part of the federal Truth in Lending Act, a major federal consumer protection law. HOEPA applies only to certain high cost predatory loans. If HOEPA applies to your loan, it should be closely scrutinized to determine whether the lender made certain required disclosures to you or included certain prohibited terms. In that event, you may be able to cancel the contract and/or get monetary damages from the lender.

The Real Estate Settlement Procedures Act (RESPA)
Most home equity loans and refinance loans are subject to RESPA requirements. This law is intended to protect you from unnecessarily high settlement charges (closing costs) and requires advance disclosure of those costs. This is to help you make an informed decision as to whether the offered terms are reasonable and acceptable. Another important provision of RESPA is a prohibition against kickbacks to brokers of the loan and a prohibition on unearned fees. Violations of certain RESPA provisions can give rise to a claim for statutory damages.

Illinois Consumer Fraud and Deceptive Practices Act (CFA)
Even if the loan did not qualify as a “high risk” loan under the High Risk Home Loan Act, predatory lending practices can still give rise to an argument that the lender has violated the CFA.

The Federal Equal Credit Opportunity Act (ECOA)
This act prohibits discrimination in any aspect of credit on the basis of age, race or national origin.

The Federal Fair Housing Act
This act prohibits discrimination on the basis of race, color, national origin, religion, sex, disability or familial status in the making or purchasing of residential real estate loans.

Unconscionable Terms
A lender may be unable to enforce certain predatory terms in a contract if a court determines them to be “unconscionable.”

Unconscionable terms in a contract are those that are so unjust that:

  • Any reasonable or informed person would not have agreed to it;
  • They result from the lender having taken advantage of a superior bargaining position to take unfair advantage of the borrower’s inexperience.

Good Faith Requirements
The lender may have violated a duty implied in the law called the “duty of good faith and fair dealing.”

Foreclosure Rescue Scams

There are a great many mortgage foreclosure rescue scams. Anyone whose home is in foreclosure will receive many pieces of “vulture” mail that offer a variety of pseudo-solutions. The homeowner should always beware of those “solutions” and seek out approved credit counseling agencies or an experienced attorney instead. Typically, the scam artists will tell the homeowner(s) that they have excellent credit and can get a mortgage on the property to pay off the foreclosing lender. The scam artists will, instead of providing a loan, require that the homeowner(s) deed the property over to them, and then lease the home back, often at a monthly “rental” rate that is unaffordable - i.e., rental rates higher than the loan payments the homeowner could not afford and resulted in the foreclosure in the first place. Now, the scam artists have title to the home and may have placed a mortgage on the home for more than the homeowners thought was the re-purchase price. In the end, often the ex-homeowner is foreclosed upon or evicted.

On January 1, 2007, Illinois enacted the Mortgage Rescue Fraud Act. The purpose of the Act is to protect residential property owners who are at risk of losing their homes because of foreclosure or nonpayment of real estate taxes (or who are more than 90 days delinquent on any loan that is secured by the property) from the potentially unscrupulous behavior of “distressed property purchasers” and “distressed property consultants.” The Act establishes contractual requirements for both distressed property purchasers and consultants to protect homeowners in these difficult financial situations. The Act also lists specific activities that constitute a violation of the Act. Finally, the Act provides for both civil and criminal penalties against any party who violates the Act.

Reverse Mortgages

Some seniors are house rich but cash poor. That means they have a small, limited income, but have considerable equity in their home. Seniors who are 62 years old or older who are homeowners may consider reverse mortgages.

What is a Reverse Mortgage?

A reverse mortgage is a bank loan against your home that you do not ever have to pay back as long as you live there. The reverse mortgage loan plus interest and any lender advances become due when you die, sell your home, or permanently move out of your home.

The amount of money a homeowner can get from a reverse mortgage depends on the age of the borrower, the current interest rate and the fair market value of the home. The amount will be significantly less than the fair market value of the home. This means that you will never owe more on the home than it is worth.

The loan disbursement from the reverse mortgage lender or its servicer to you may come in different forms, including:

  • Monthly payments
  • A lump sum
  • A line of credit (where you can write a check or borrow up to a certain amount as the income is needed)
  • A combination of these forms

Generally, the costs of the loan (such as title insurance, appraisals, etc.) are rolled into the mortgage loan itself. As with other forms of refinancing, a reverse mortgage can be very expensive.

As a homeowner, you keep your ownership interest (title) in the home. When the borrowers die or are no longer living in the home, the home is usually sold. The proceeds from the sale are used to repay the reverse mortgage loan plus accrued interest.

Who is Eligible for a Reverse Mortgage?

To be eligible for a federally insured reverse mortgage:

  • You, and any other owners of your home, must be age 62 or over;
  • At least one owner must live in your home as a principal residence;
  • Your home must be a single family residence in a 1 to 4 unit dwelling;
  • Your home must meet minimum property standards of the U.S. Dept. of Housing and Urban Development (HUD), but you can use the loan proceeds to pay for any required repairs;
  • You must discuss the program with a HUD-approved counseling agency and obtain that agency’s counseling certificate.

ADVOCACY TIP
To find the counseling agency nearest you, call 800-569-4287 (toll free) or search online at HUD's List of Housing Counseling Agencies. You may also request HUD approved counseling via telephone by sending an email to the AARP Foundation at Rmcounsel@aarp.org.

Other Considerations

There are many factors you must consider before entering into a reverse mortgage. Reverse mortgages reduce the value of the estate for your heirs. Also, you should consider the costs, the amount of income that you will receive, and the length of time you plan to stay in the home (because the loan will become due when you move).

Mortgage Foreclosure

The Foreclosure Process

If you fall behind in mortgage payments, the lender may attempt to foreclose on the property. In a foreclosure, you risk not only the loss of your home, but also any accumulated equity in the home. Other effects of a foreclosure include a personal judgment against you for the debt and the loss of future credit, because a foreclosure judgment will appear on your credit report.

“Foreclosure” is a court proceeding in which the lender (or other entity holding the mortgage) customarily asks that the property be sold at auction to pay off the loan secured by the mortgage, and that the borrower be ordered to pay any costs (including the principal remaining on the loan) not recovered by the sale price.

The process starts with the filing of a court paper called a Complaint and ends with eviction by the Sheriff. On the average, it takes about 8 to 10 months to complete the foreclosure process. If you assert any defenses in a foreclosure case, this can delay the process many months to allow the foreclosing lender and the homeowner to prepare for and conduct a trial on the foreclosure suit. Foreclosure defenses may save you money but are seldom a way to defeat the foreclosure itself unless you have a legal way to “rescind” the mortgage.

Typical Example of How the Foreclosure Process Works in Illinois: The bank may move faster or slower, depending on mortgage contract provisions, other rules affecting the loan and its own inclinations.

  • January 1: Homeowner fails to make a mortgage payment.
  • February 1-28: The bank sends a notice stating that the homeowner is in default and suggesting that the homeowner contact the bank. The bank may offer the homeowner an opportunity to work something out to avoid foreclosure (see below).
  • March 1-31: The bank sends notice that it intends to foreclose and sends the file to its attorney.
  • April 1-30: The attorney reviews the file, and prepares and files a complaint to foreclose the mortgage in court.
  • May 1-31: The homeowner is served with the Complaint.
  • June 1-30: Within 30 days of being served, the homeowner must file a response to the Complaint. If that is not done, the bank’s attorney will file a motion for a default judgment against the homeowner. Soon thereafter, the court enters a default judgment and an Order of Foreclosure.
  • Approximately Sept. 15 (7 months after last defendant was served, or 3 months after the Order of Foreclosure, whichever is later): A Sheriff’s sale of the home takes place at public auction.
  • October 1: A court order confirming the sale and an Order for Possession (eviction) is entered. The Order for Possession is stayed (postponed) for 30 days.
  • November 1: The Order for Possession is given to the Sheriff, who schedules an eviction. The Sheriff may or may not post a written notice on the front door of the property that its officers will be there at a specific time to execute the eviction. At the scheduled time, the Sheriff’s officers take the personal property in the home out to the curb.

ADVOCACY TIP
If you are in foreclosure, you can expect to receive a flood of mail, offering quick fixes and advice. Discard this kind of mail. Most likely, they involve scams to refinance (at exorbitant interest or with hidden fees) and offers to buy the property, to pay off the mortgage and resell the property to the homeowner, usually at an inflated price or on terms very likely to cause default.

Defenses to Foreclosure

Foreclosure is a very complicated area of law. There may be defenses related to the making of the home loan, computation of interest, or collection and crediting of mortgage payments. In addition, borrowers under some subsidized programs, such as FHA and VA, have special rights. Therefore, it is very important that you speak with an attorney. The attorney should carefully review the loan documents and the foreclosure complaint to determine if there are any defenses. A list of some possible issues that may create defenses follows:

  • Lost Payments. Sometimes payments should have been applied to your account, but the lender failed to apply them.
  • Failure to Accelerate the Note. The loan cannot be foreclosed until the loan is accelerated. If the loan documents require notice because of acceleration, failure to send the notice may defeat the foreclosure.
  • FHA Insured Loans. FHA loans have special servicing requirements, including a counseling notice mailed to the mortgagor within 45 days of default, a face-to-face meeting with the borrower within 90 days of default, and a notice of available counseling. Failure to comply with these rules is a defense.
  • Accepting Payments After Foreclosure. If the lender accepts payments after filing foreclosure, and the mortgagor is not in bankruptcy, there may be a technical defense to the foreclosure.
  • Truth-in-Lending and HOEPA Violations. Violations of federal laws called the Truth-in-Lending Act and the Home Ownership and Equity Protection Act (HOEPA) may be raised as a defense at any time. These can be particularly powerful tools (even voiding the mortgage) if the mortgage is a refinance. An attorney must review the original disclosure documents to determine if there were any violations.
  • Fraud, Abuse and Collusion. In rare cases where the loan is clearly abusive or coercive, it may be possible to raise a defense to foreclosure.
  • Failure to Attach Note and Mortgage to Complaint. If the note and mortgage are not attached to the Complaint, the Complaint is defective. However, the lender can correct this and serve you again.
  • Incorrect Notice or Service. If you were improperly served with notice of the foreclosure suit, or if other required notices were not accurate, that might invalidate any subsequent order entered by the court.

Take Action to Work Things Out Before Foreclosure Is Started

As soon as you realize there will be a problem in making the payments, it is a good idea to contact the lender to see what options are available to work things out. You should keep a record of all attempts to contact the lender, who you talked to and the results of the contact. Depending on the type of loan, the lender may have had an obligation to offer a face-to-face meeting.

Once the bank refers the matter to an attorney to begin the foreclosure process, additional costs begin accruing, such as attorneys’ fees, filing fees, service fees and other court costs. Interest at the agreed rate will continue to mount. All of these costs will ultimately be added to the charges you will owe. This is true even though the bank may have refused to accept any more payments.

ADVOCACY TIP
Once the foreclosure process begins, you should set aside (not spend) your scheduled monthly mortgage payments as they come due. This will give you the best chance to remain in your home.

Generally, banks have no interest in moving you out of your home. The bank’s primary objective is to get its money. If you can present a plan which lets the bank achieve its goal, that is, to get a continued flow of payments, a foreclosure can be avoided. Also, lenders often have a legal obligation to consider whether it would be practical to use various alternatives to foreclosure known as loss mitigation.

A general description of some of those foreclosure avoidance options are as follows:

Special Forbearance
This option should be available if you have recently experienced financial hardship due to circumstances beyond your control. This is an agreement which would allow for a period of reduced or suspended payments up to 18 months from the date of the oldest installment due. The amount after forbearance cannot exceed the equivalent of 12 monthly payments. At the end of the forbearance period, you must resume making full payments. You will agree on a repayment plan with the bank throughout the remaining term of the loan for the arrears that accumulated during the forbearance period.

Mortgage Modification
This may be appropriate if you have recovered from financial distress, but your income has been lowered from what it was before the default. The lender re-amortizes the principal balance over a term not to exceed 30 years.

Partial Claim (FHA Mortgages Only)
This is an option only if mortgage modification and special forbearance are not possible. You must be more than 4 but not more than 12 monthly payments behind. You must show you now have sufficient income to resume making full payments. HUD pays the arrearage to the bank. You give HUD an interest free mortgage for the amount of the arrearage, which calls for repayment at some future date or when ownership is transferred.

Temporary Indulgence
The lender may allow a month or two grace period to bring payments current.

Deferral of Principal
You pay only interest for a period of time and then you resume normal payments.

Partial Reinstatement
You pay one half of the delinquency and agree to a repayment plan no longer than 18 months to pay off the rest.

Streamline Refinance
The lender issues a new loan at current market rates. This is an option only if the loan is or can be brought to 2 months or less delinquent.

Refinance
A different lender provides a new loan. You should be very wary of this option. You are likely to receive many offers to refinance the loan and save the home. They are usually predatory, and you may ends up losing the house after even more expense.

Repayment Agreements
You pay the arrearage with an additional payment each month. The term is usually limited to 12 months, not to exceed 18 months.

Deed in Lieu of Foreclosure
In this scenario, you move out of the home, and you sign over title on the property to the bank. The bank agrees to accept a deed from you as complete satisfaction for all amounts owed to the bank. There can be no junior liens on the property for this to work. We recommend that you use an attorney for the preparation of these documents to avoid charges of practicing law without a license.

Special Arrangements
At the time of publication, various proposals have been made for lenders to reduce the borrower’s interest rate, to convert certain adjustable high-rate loans to affordable fixed rate loans, to extend the maturity of the loans, and/or to reduce the principal balance of the loan to an amount not to exceed the market value of the encumbered home. If applicable, check with your loan counselor or attorney about the current status of these proposals.

Homeowner Sells the Home
If you can sell the house yourself, you may be able to save some of your equity, provided that the sale gives you enough money to cover the amount owed the lender plus costs. A private sale is likely to get a better price for the home than a public auction by the Sheriff. You can sell the house at any point up to the final redemption date and use the proceeds to pay off the bank (including costs and fees). An assumption of the mortgage by the purchaser also may be possible. The lender may also agree to a short sale (a sale for less than the debt owed) if the value of the home has been assessed at less than the amount of the debt. However, a short sale may have tax consequences because the amount of the forgiveness of debt might be considered to be income. At the time of publication, legislative proposals are pending to exclude such forgiven debt under certain circumstances. See your tax advisor for the latest information.

Your Options Once the House Is in Foreclosure

Once the house is in foreclosure, you should decide if you can keep the house or if you will be forced to move. You have to make a realistic and careful assessment of your income and expenses to determine if it is feasible to keep the home. If you decide to keep the house, you must reinstate, redeem, file a Chapter 13 bankruptcy or attempt a work out with the lender, considering the options described earlier. If you do not want to keep the house, you can sell the house, offer a “deed in lieu of foreclosure” or file bankruptcy.

Right to Reinstatement
When you are behind in mortgage payments, the lender is usually able to accelerate the loan (declare that the entire amount that you owe is immediately due). However, you may be able to reinstate the loan so that the scheduled monthly payments will begin again. To reinstate the mortgage loan, you must pay all delinquent payments, any interest or late fees on those payments, and any costs or expenses that the mortgage agreement says must be paid. The lender (or its attorney) should be able to advise you as to the total amount that must be paid.

There are time limits for reinstatement. It must be done within 90 days from the date you were served with summons in the foreclosure or within 90 days after the date notice of the foreclosure appeared in the newspaper.

Right to Redeem
You also have the right to redeem. This means that you can free your home from the foreclosure by paying the full amount of the loan still owed plus accrued interest and costs. Generally, the house can be redeemed up to seven months from the day you were served with summons or by publication in the newspaper, or three months from the date of the court order of foreclosure and sale (whichever is later).

Bankruptcy
There are two types of bankruptcy available to individuals. Chapter 7 bankruptcy discharges most debts. Chapter 13 allows a debtor to submit a plan to the bankruptcy court, which if approved allows you to pay off only a part of the debt and to do so over a period of time. If you have enough regular income so you can bring the mortgage current within 36 months, you may be eligible for a Chapter 13 bankruptcy. This will allow you to keep the house. If not, you can file a Chapter 7, which will allow you to escape personal liability for the debt. In most cases, Chapter 7 will not let you keep the home. Any bankruptcy filing will stay (postpone) foreclosure proceedings and extend the redemption deadline. A Chapter 7 Bankruptcy is not an option if you have been granted a discharge in bankruptcy in the last 6 years.

Your Right to Stay in Your Home During Foreclosure Proceedings

During the period for reinstatement and redemption, you generally have the right to remain in the home. An exception occurs where the mortgagee bank is authorized by the terms of the mortgage or other agreement to have “possession” and the bank can show good cause why it should be in possession instead of you.

The foreclosure law permits you to stay in the property for 30 days after the court confirms the foreclosure sale as long as you pay the fair market rent to the purchaser or you pay the monthly interest due on the purchaser’s mortgage. The new purchaser can get the court to order possession during this time only if the prior written agreement permits it and if the purchaser can show good cause why you should have to move. Once 30 days after the confirmation of the sale pass, you no longer have any right to stay in the home unless the purchaser agrees. It is not necessary for the purchaser, at that point, to file an eviction case to have you moved out because the court will have entered an order of possession against you in the foreclosure case.

Tax Sale

It is absolutely essential for you to pay your property taxes. If you do not pay your property taxes, the county may auction off and sell your delinquent taxes to the highest bidder, and with them, your home.
Example: If you owe $3,500 in taxes, the county can sell the delinquent taxes on your $150,000 house to get the taxes you owe.

You can pay the delinquent taxes, any interest and costs owed to the county collector at any time before the original tax sale. In addition, you have a right to redeem the property after the taxes are sold. To redeem the property, you must pay the taxes due, special assessments, interests, penalties and other costs by a certain date. Generally, this must be done within two years from the date of the original tax sale, although it can be extended once under certain conditions. You should contact the county tax assessors office to determine the amount needed to redeem the property and the date by which the payment must be made. If you do not redeem your sold taxes and the tax buyer files a lawsuit to obtain a tax deed to your home, you may lose the title to your home - for a tax debt possibly far below the value of your lost home.

Indemnification Fund for Property Lost to Tax Buyers

State law requires each county treasurer to maintain a special account, known as an “indemnity fund.” The treasurer puts in this fund those fees which the county collects from tax buyers.

A “tax buyer” is someone who buys tax delinquent property by bidding for those delinquent taxes at a public auction. The county imposes a fee on the person who buys the delinquent taxes.

If you lose your homestead property by issuance of a tax deed, and your time to redeem the property has passed, you may petition the Circuit Court where the property is located for an award from the county treasurer’s indemnity fund. The State’s Attorney’s will represent and defend the County Treasurer in court. If the court believes that in fairness and good conscience you should be able compensated, the court may grant your petition. Sometimes the tax buyer will agree to give the homeowner his title back in exchange for the amount of the indemnity award.

The indemnification may exceed $99,000 but only if you can prove the loss was without homeowner fault or negligence. Each case is decided on its own facts. The court will consider whether the owner exercised ordinary reasonable diligence under all the relevant circumstances.

When determining your right to equitable indemnification, the court must consider whether you exercised ordinary reasonable diligence under all of the relevant circumstances. Inability to pay the taxes, by itself, is insufficient. Circumstances to be considered in determining equitable entitlement to indemnity from the county’s tax deed indemnity fund include the mental, physical and financial status of the person seeking indemnity, the person’s comprehension of property taxes and the duty to pay them, and the person’s diligence and credibility.

Senior Citizens Real Estate Tax Deferral

The Senior Citizens Real Estate Tax Deferral Act permits certain low income persons age 65 and older to have their real estate taxes and special assessments deferred. This means that they do not have to pay the taxes and assessments during the period of the deferral. However, the charges are imposed as a lien against their homestead property.

Payment on the deferred taxes is due only after the death of the taxpayer or when the property is sold, whichever comes first. Special provisions apply to protect the rights of a surviving spouse who is at least 55 years old within 6 months of the death of the taxpayer.

Homeowner Eligibility for a Tax Deferral

You may be eligible if you:

  • Are the owner and occupier of homestead property
  • Are 65 years or older
  • Have sufficient equity in the property
  • Have annual household income which is less than $50,000
  • Cannot afford to pay your real estate taxes
  • At the time of application for the deferral there are no liens for unpaid real estate taxes against the property

What Property Is Qualified for Tax Deferral?

The taxpayer must have owned and occupied the property as his/her homestead (or other qualifying property) in the state for at least 3 years. The 3 year period includes any period of temporary absence while in a nursing home or sheltered care home, so long as it was not for more than one year. Income producing property does not qualify, nor does property which is already subject to a lien for unpaid taxes when a claim under the Tax Deferral Act is filed.

Limits on the Amount of Taxes that Can Be Deferred

The total amount of taxes deferred plus interest (at 6%) for the years in which the deferral is claimed cannot exceed 80% of the tax payer’s equity. If the deferred amount equals 80% of the tax payer’s equity interest, the taxpayer must pay the annual interest due so that the deferred amount does not exceed 80% of the taxpayer’s equity interest.

Joint owners and the bank that holds the mortgage must give prior written approval of the tax deferral, and the taxpayer must carry insurance on fire or casualty loss for at least the total amount of taxes deferred.

Where and When to Apply for a Real Estate Tax Deferral

Apply for a tax deferral at the office of your county tax collector. You should apply for a tax deferral by March 1 of the year in which the tax is due and payable.

Other Property Tax and Exemption Advantages for Senior Citizens

ADVOCACY TIP
The Illinois legislature and local governments often change laws and programs relating to property taxation. At the time of publication of this edition, there were many different bills pending in the state legislature related to tax exemptions, freezes and assessments. The reader should proceed with caution, as this area is subject to frequent change.

The Property Tax Assessment Homestead Exemption for Senior Citizens

Under the Illinois Senior Citizens Homestead Exemption, seniors can reduce the equalized assessed valuation of their homes. By reducing the assessed valuation, seniors will be able to reduce their property taxes. To be eligible for the exemption, a senior (aged 65 years or older) must:

• Occupy the property as a residence
• Have an ownership interest in the property
• Be liable for paying property taxes.

For tax years 2008 and thereafter, the maximum reduction from the property’s value is $4,000. Counties may set a time period within which you must apply for the exemption, and may require that you reapply annually. Check with the tax assessor or county treasurer.

When a homestead exemption has been granted and the senior subsequently moves into a licensed nursing home, the senior can keep the exemption, if:

• The senior’s spouse still lives there, provided the spouse is also a senior; or
• The home is unoccupied but still owned by the senior.

This “homestead exemption” for seniors for reducing the assessed value of their real estate for property tax purposes should not be confused with the homestead exemption applicable to creditors’ claims. The latter provision prevents creditors from selling any person’s home to satisfy the payment of a debt, if the person’s equity interest in the home is less than the exemption amount. If there is a single owner, that amount is $15,000. If there are 2 or more owners, the value of the exemption for each owner is his or her proportionate share of $30,000 based upon percentage of ownership. If equity is greater than the exemption and a creditor forces a sale of the home, then the owners are entitled to be credited the amount of the exemption, payable to the homeowner(s) before the creditor’s share of sale proceeds.

The homestead exemption for seniors also should not be confused with the general homestead exemption which reduces the assessed valuation for all homeowners who occupied the home as of January 1 of the tax year. The amount of the general homestead exemption is the increase in the current year’s equalized assessed value (EAV), above the 1977 EAV, up to a maximum of $5,500 for 2008 and $6,000 for 2009 and thereafter. Seniors may be entitled to both the general homestead exemption and the senior citizens homestead exemption.

The Senior Citizens Assessment Freeze

If you are a senior with a household income of $50,000 or less per year, you can have the assessed valuation of your home frozen at the level of the first year that you qualified and applied for the Senior Citizens Assessment Freeze Homestead Exemption. You qualify if you have an ownership or possessory interest in the real estate, it has been your principal place of residence, and you are liable for payment of the property taxes. You must file the application for the assessment freeze (form PTAX-340). Counties may set the application deadlines. Limited extensions of the application deadline may be granted for persons incapable of filing due to a mental or physical condition as documented by their attending physician.

Refund of Property Taxes

If you are a homeowner age 65 or older who owned and occupied a taxed dwelling for more than 6 months of the tax year, you may be able to get a property tax refund. The Senior Citizen Property Tax Refund Act provides that any city, village or unincorporated town may pass a resolution or ordinance allowing a refund of real property taxes paid to it by such persons. Co-owners must be at least 60 years of age and no portion of the property can have been rented for others during the tax year. Check with your city or town to see if they have passed such a resolution or ordinance.

Reduction of Mobile Home Taxes

You may have your Mobile Home Local Services Tax reduced by 20% if you are:

  • Age 65 and older or disabled
  • Reside in the mobile home
  • Hold title to the home under the Illinois Vehicle Code

You should file your application for reduction of the tax with the county clerk by May 15. Contact the county clerk or local assessor for the application.

Circuit Breaker Property Tax Relief

The Circuit Breaker Property Tax Relief Program can provide you with a direct cash grant to help you pay your property taxes. See Circuit Breaker Property Tax Relief Program for Homeowners and Renters.

Where to Go for More Information

Statutes and Regulations

Agencies and Organizations

Both HUD and AARP have good websites on reverse mortgages. 

You can receive free information about reverse mortgages by calling AARP at 1-800-209-8085.

County Treasurer's Office
Help on senior citizens’ property tax relief is often available at your county treasurer’s office.

Illinois Legal Aid Online

Legal information and forms are available.

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