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Bankruptcy dismissed, gift of equity
I have a client who has been residing in her mother’s home. She was living there when her mother passed away in 2019, the property is still in her mother’s name. my client filed for bankruptcy, but it was dismissed due to non-payment.
Now, the property is facing foreclosure. Since it was not included in the bankruptcy and the case has been dismissed, we believe that court approval should not be necessary for the transfer, of her Mom’s home. We are currently waiting on the title commitment, but the general consensus is that she should be able to retain any funds unless any judgments arise.
To facilitate the process, we will be executing an heirship affidavit to transfer the deed. Given that the property was inherited, we anticipate that the chain of title transfer will not present any issues.
Additionally, we are considering a gift of equity since the property is valued significantly higher than the outstanding mortgage. There is enough equity to gift 20% and cover all closing costs. However, we are also weighing the option of selling for a lower price without the gift, which would only involve a 3.50% down payment. What would be the most effective approach to keep monthly payments more affordable in this scenario?
There are many moving parts in this situation, and I want to ensure we are making the best decisions without overthinking the process.
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1 Reply
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To find the best ways to keep monthly mortgage payments manageable for your client, consider these factors: the property is in her deceased mother’s name, is being placed into foreclosure, and your client inherited it while going through a bankruptcy that was dismissed. The strategy involves conveying title through an heirship affidavit, and you’re considering two alternatives—a gift of equity or a sale at reduced price with a 3.5% down payment. The objective is to have your client’s name on the property, halt foreclosure, and make reduced payments, all while preventing unnecessary complications. In the following paragraphs, I analyze the case and my recommendations.
The property, still registered in your client’s mother’s name (who died in 2019), is at risk of foreclosure because of an outstanding mortgage. Your client, who has lived there since before her mother’s death, declared bankruptcy, which was dismissed due to non-payment and didn’t include the property in the bankruptcy estate. This dismissal likely indicates that no court approval is needed for the transfer, assuming the title commitment does not contradict. An heirship affidavit will be executed to transfer the deed to your client, presuming she is the sole heir without title complications such as liens or other potential heirs. The property’s value greatly exceeds the mortgage balance, which provides sufficient equity to make a gift of 20% and cover closing costs. You’re contemplating whether to reduce the loan amount using the equity or list the property to sell it for a lower price with a minimal 3.5% down payment, which suggests an FHA loan.
This option offers a unique 20% equity gift approach when selling or transferring a property to your client. Take, for example, the property worth $300,000. There is an existing mortgage of $150,000 on the property. A 20% equity gift amounts to $60,000, which reduces the selling price of the property to $240,000. Your client will obtain a new mortgage to pay off the existing loan and the closing costs (for instance, $6,000), which puts the loan at approximately $186,000. At a 6.5% interest rate over 30 years, your client would owe $1,175 monthly on the mortgage for principal and interest; adding $375 for taxes and insurance comes to around $1,550. Since the loan-to-value ratio is below the 80% threshold, no private mortgage insurance would be needed, lowering expenses. Out-of-pocket cash expenses required upfront are minimal (around $500-$1,000 for legal or appraisal work), because the equity gift takes care of the closing costs and all the later expenses. This method is effective for reducing payments and helping preserve cash reserves; however, it does depend on lender approval for the Gift and affidavit of the heirship, and your client’s credit (after bankruptcy) has to qualify for a conventional loan.
Alternatively, consider selling the property to your client for a lower price of $240,000. A 3.5% downpayment ($8,400) applies here, and an FHA would likely be used. Paying off the $150,000 mortgage + closing costs would mean the loan amount is roughly $237,600. The monthly payment at 6.0% interest for 30 years would be $1,425 with an additional $168 for PMI (also required for FHA loans) and $375 in taxes and insurance, meaning a total of $1,968 monthly. The out-of-pocket cash required upfront is rather high ($8,400–$10,400, including closing costs), which strains your client’s finances. Although FHA loans tend to have lower credit score requirements, the increased loan amount, coupled with PMI, raises the monthly payment significantly. PMI also does not fall off for quite some time, meaning more long-term debt.
The Gift of equity adds to affordability by eliminating cash need and reducing monthly payments by $418 ($1,550 vs $1,968). Given the client’s post-bankruptcy financial situation, these factors are critical. The Gift of equity also avoids PMI, adding a savings of $50–168 a month, and builds a greater equity stake for future stability. However, several factors must align: confirmation by title commitment of no liens or additional heirs, your client qualifying for a loan (preferably conventional, or FHA with weak credit), and the foreclosure timeline must allow time to close. If your client is the sole heir, the heirship affidavit should not be complex; however, the lender might examine the title of the inherited property closely. Legally, the dismissed bankruptcy should not impose barriers. Still, your client’s credit score (which has been negatively impacted since 2019) could restrict loan conditions, posing a requirement of 580 for FHA loans or 620-640 for conventional.
The urgency of the foreclosure process (e.g., 120–200 days for judicial foreclosure) also varies by state. The mortgage servicer should be contacted to confirm the payoff amount and discuss any delays, such as forbearance, that would buy time. Issues with the title, such as creditor liens or undisclosed heirs, could delay the transfer. Expedite the title commitment review and bring an attorney to address these issues. A gift of equity might warrant filing a gift tax return if it exceeds $18,000 (2025 exclusion), but clients typically incur no taxes. Reassessment of property taxes reassessment is a risk in some states upon deed transfer, in some states, so local rules (e.g., parent-child exemptions) should be checked to avoid payment increases. Property taxes may spike unexpectedly. Another option is refinancing the existing post-transfer mortgage. Still, lenders may be reluctant to approve this, given the foreclosure and inherited status.
To capture the Gift of equity, first examine the title commitment to check for a properly ordered chain of title. Afterwards, about the partition covering, file the heirship affidavit, with caption “In the Matter of the Estate of John Doe”, to transfer the deed, making certain the lender will accept. Apply for a conventional loan of about one hundred eighty-six thousand dollars with a gift of equity letter, an FHA loan if credit is an issue, including the affidavit, death certificate, and appraisal. Work with the current lender to stop foreclosure by paying the current mortgage balance. Lastly, consult with a tax lawyer to estimate reporting on gift tax and property tax obligations. As for the hurdles of equipping Gift of equity spell out (if rejected by the lender, or having bad credit), switch to an FHA loan version pegged at the lower sale price while ensuring your client can afford the $8,400 down payment coupled with an estimated higher payment of $1,968. Either way, act first to delay foreclosure, hire a real estate attorney and a mortgage broker to expedite matters.