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Saturday, July 28, 2007 - Page updated at 02:01 AM

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Homestead exemption protects equity

Seattle Times staff reporter

Q: I hear there's a new homestead exemption in Washington state. What are the benefits for homeowners?

A: Washington, like other states, has long had a homestead exemption. Enacted into law, this exemption protects a certain amount of home equity from creditors and is intended to help keep families from losing their homes in hard times, according to a recent state Senate report.

The Legislature increased the homestead exemption from $40,000 to $120,000, effective July 22. While other states require homeowners to file paperwork in order to be eligible for this exemption, Washington grants it automatically to all homeowners.

Most homeowners never use the exemption, but it can be helpful to those in financial distress.

"It helps people in bankruptcy because it protects equity in their home," says Seattle attorney Christina Latta of Seattle Debt Law. "They could file [bankruptcy] and they wouldn't have to pay the equivalent of that available equity to creditors."

Q: My fiancé and I will marry next month. We each own a house. Is there any reason to put — or not to put — our names on both houses? We'll most likely sell one of the houses eventually.

A: You have complete control over a home titled in your name only, and that control is not something to give up lightly, says Seattle attorney Mary Ann Vance of Vance & Ridgway.

"The large issue is: Do you want to make these homes community property or do you want to maintain them as separate property? There are a number of things that would go into that analysis," Vance says.

Equity is one of them. If one of you has, for example, $400,000 in equity and the other has $40,000, the person with the larger amount is contributing much more to the union than the other. Vance says she'd ask, "What are you really getting for the money for doing it?"

Another important factor: your credit histories.

"If someone has a bad credit rating and you put them on your title, you've dirtied up the title with their judgments and liens," she says.

That's why she recommends that, as unromantic as it sounds, you share credit reports with each other.

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Still another factor: other heirs. If you have children from previous unions and one of you dies without a will, the surviving spouse keeps their half of each of the houses and also inherits half of the deceased person's share of them. This gives the survivor three-fourths ownership.

The final quarter is inherited by the deceased person's kids. That might not sit well with the remaining spouse who can't sell, or even keep, the property if the other heirs object. Indeed, the only way around that is to go to court.

There are other factors, too, including timing the sale of one house to get the best tax advantage, and getting permission from your mortgage lenders to add names to titles. Mortgage documents commonly require that.

Because these situations are so individual, Vance suggests that you consult with a real-estate attorney who can tailor advice to your situation.

Also, an estate attorney can draw up wills that can ensure your property is eventually disbursed as you wish.

Q: I live in a small unit in a Seattle co-op, and I want to do $30,000 to $40,000 in work, but I can't find a lender. Either the complex is too small or the amount is too small. How do you get financing to make building improvements in a co-op?

A: First, a bit of background. Physically, cooperatives and condominiums look alike, but legally they're quite different.

A condo buyer owns the interior of his or her own unit plus a share of the common area. A co-op buyer owns shares in the corporation owning the building rather than holding title to a particular unit, although he or she is entitled to use a specific unit.

Around here, condos are much more common than co-ops, so financing is more readily available for them.

"There are only about 40 co-ops in the city, and that's what makes them a boutique market," says David Baker, vice president of Eagle Home Mortgage.

Without more information, it's impossible to say exactly why you're encountering problems, but Baker says co-op owners customarily have a hard time getting a loan to rehabilitate a unit that's already been gutted.

Indeed, Baker says money sources he works with "demand photos of bathrooms and kitchens before they'll OK loans. So the crux of the matter is: What's the status of the property?"

It's much easier, he says, to get money for cosmetic upgrades like adding a bamboo floor or replacing kitchen counters with granite.

Depending on the project and the borrower's financial profile and needs, a cash-back refinance might be available, or a home-equity line of credit or a second mortgage.

The Washington Chapter of the Community Associations Institute is a nonprofit organization dedicated to educating people who belong to homeowners associations.

Its Web site, www.wscai.org, has a list of exhibitors that includes lenders. Those on the exhibitors list might be a place for you to look for financing.

Another option is www.ncb.coop, a bank that offers financing on co-ops.

Finally, the National Association of Housing Cooperatives, www.coophousing.org, has information on various aspects of co-op housing.

Home Forum answers readers' real-estate questions. Send questions to Home Forum, Seattle Times, P.O. Box 1845, Seattle, WA 98111, or call 206-464-8510 to leave a question on a recorded line. The e-mail address is erhodes@seattletimes.com. Sorry, no personal replies. More columns at www.seattletimes.com/columnists.

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