DEAR BOB: You should warn home buyers about the risks of buying a foreclosed "as is" home. We are dealing with a Freddie Mac foreclosure. Our inspector discovered that there was severe termite damage to window casings and adjacent wood framing and that the chimney is moving away from the house. He also found chimney cracks, a gas leak in the water heater and a dielectric union missing at the main shutoff. We canceled our offer to Freddie Mac unless these items, costing about $8,000, are repaired.

Considering that these homes are sold "as is," does the lender have to disclose the defects discovered by our inspection to other buyers? We are worried about future buyers who come upon the house because the exterior and interior are in beautiful condition.--Lisa S.

DEAR LISA: Congratulations on following my constant advice to home buyers to always include a professional inspection contingency clause in purchase offers. As you discovered, most foreclosed houses are sold "as is." The sound reason is that the foreclosing lender often doesn't know about the defects of the house so should not be held liable for nondisclosure. However, once a foreclosing lender, such as Freddie Mac, learns about serious defects discovered by a professional inspector, those defects should be disclosed to other potential buyers, even in "as is" sales.

Unfortunately, the law is not crystal clear on this issue. A few years ago, a California appeals court case said a foreclosing lender who knew about home defects must disclose them to bidders at its mortgage foreclosure sale. Thanks for warning us about buying "as is" houses from lenders after the foreclosure sale.

DEAR BOB: I am nearly 80 and enjoy your articles about reverse mortgages and living trusts. However, I've heard that if a person's assets do not total at least $600,000, it is not a good thing to have their home and other assets in a living trust. Is this true? I already have a written will.--Ella K.

DEAR ELLA: Your informant is mistaken. The primary purpose of putting title to your home and other major assets in a living trust is to avoid probate costs and delays after you pass on. For decedents dying in 1999, there is no federal estate tax for up to $650,000 of net assets in the estate. But your home and major assets subject to your will usually require probate.

For example, before my mother died a few years ago, her Minnesota lawyer advised her not to put her condominium into her living trust. The result was it took almost a year and about $2,000 in wasted attorney and other probate fees to clear up the condo's title.

Another living trust advantage, in addition to avoiding probate costs and delays, is that the successor trustee (such as a spouse, adult child or bank trustee) can take over, without court interference, if you should become incompetent and unable to manage your affairs. Without a living trust, appointing a conservator or guardian requires costly court action.

DEAR BOB: My husband is ill. He could die at any time, or he might live many years. He has no life insurance. We have a large mortgage with a monthly payment of about $3,500. While he is alive, his income continues. But if he dies, I could not afford the mortgage payments.

However, I want to keep the house until our two teenagers are grown. I think we should take $200,000 from our certificates of deposit and mutual funds to pay down the mortgage now. He says "no" because we have a good 6.75 percent interest rate mortgage. What do you advise?--Marilyn C.

DEAR MARILYN: Paying down your mortgage balance will not reduce its monthly payment unless the lender will "recast" the loan to reduce the monthly payment. Some lenders will, but most won't. If you pay down the mortgage by $200,000, you can't get that money back except by refinancing or selling. Should your husband die, you probably won't be able to get a refinance at such a low interest rate.

There is no perfect answer to your situation, but for now I would not recommend paying down the mortgage. If your husband dies soon, that $200,000 can be used for about five years of mortgage payments while you stay in the house.

DEAR BOB: I received a letter from a mortgage company that said I am entitled to an FHA Streamline Rate Reduction (Program 86-4). It says I might qualify for a reduction in my interest rate. It does not require any application fee, appraisal, income or credit check, and the mortgage company pays all the closing costs. They provided me with their FHA lender number. How can I check up on this company, and is this a good program?--Karen H.

DEAR KAREN: The FHA streamline refinance program to reduce mortgage interest on existing FHA home loans is excellent. It's worth checking out for your situation. If you're worried about the mortgage company, ask for their license number and check with the appropriate state license agency for any complaints and license problems.

DEAR BOB: I plan to sell my house soon. The neighbor across the street ran a day-care center with his mother. In 1993, he was charged with child molestation. The center was closed. When the case came to trial in 1996, he maintained his innocence but reached a plea bargain for a nine-month jail sentence. Meagan's Law seems to indicate I must disclose this to potential home buyers. Must I tell buyers he lives nearby?--Gail K.

DEAR GAIL: I see your letter is postmarked from California, where a new state law took effect July 1. It requires California home sellers and residential landlords to use new forms stating that information on registered child molesters is available at local police and sheriff offices. This takes the disclosure burden off California home sellers, landlords and realty agents. Hopefully, other states will pass similar disclosure laws.

DEAR BOB: In 1994, I bought a house with another single person. However, things didn't work out. In 1998, he forced me to sign a quit-claim deed to him; otherwise, he threatened to ruin my credit by stopping his mortgage payments. He called my bluff. When I moved out, he only paid me $2,000 for my share of a $150,000 house. The quit-claim deed was notarized the day after I signed it. Was I railroaded into suffering a huge loss?--Patricia D.

DEAR PATRICIA: Possibly. That quit claim-deed could be void if it was not properly notarized. You may be able to rescind it for fraud. Consult an experienced real estate lawyer to evaluate the details.

DEAR BOB: For about 15 years, until I retired in 1993, I was a manufacturer's representative and claimed a home-office tax deduction for one-seventh of my residence expenses, including depreciation. My wife and I are thinking about selling our house to downsize. How will my home-office tax deductions affect taxation of our sale profits?--Fred D.

DEAR FRED: I'll presume you and your wife have owned and lived in your principal residence an aggregate of at least two of the past five years before its sale. Then you and she are eligible for up to $500,000 ($250,000 for single home sellers) tax-free, home-sale profits, using Internal Revenue Code 121. The total depreciation you claimed years ago must be subtracted from your cost basis to arrive at your adjusted cost basis.

For example, suppose you paid $100,000 for your house and deducted $25,000 total depreciation home-office business expenses. Your adjusted cost basis is therefore $75,000, plus any capital improvements you added. If your home sells for less than $575,000 in this example, you and your wife will owe no home-sale capital gain tax. However, if you claimed any home-business depreciation deductions after May 7, 1997, that "recaptured" depreciation is taxed at a special 25 percent capital-gain tax rate. Consult a tax adviser for details.

DEAR BOB: Your recent writings about reverse mortgages interest me and my husband greatly. We are both 65. If we get a reverse mortgage to pay us monthly income, what happens after one spouse dies? Must the house be sold? Do we need a lawyer to get a reverse mortgage? Since we have a small mortgage, will that hurt us?--Mrs. S.C.

DEAR MRS. S.C.: Both co-owner spouses must be at least 62 to qualify for a reverse mortgage. Nothing happens when one spouse dies. Only after both co-owner spouses die or permanently move out must the home be sold to pay off the reverse-mortgage balance, including interest.

A lawyer usually is not needed to obtain a reverse mortgage. If you have a small existing mortgage, it can be paid off from a lump-sum reverse-mortgage advance. The easiest way to find a nearby FHA, Fannie Mae or Financial Freedom Plan reverse-mortgage lender, in all states except Texas, is to go to www.reversemortgage.org on the Internet. If you are not Internet-savvy, your public library reference department can assist you.

DEAR BOB: Your recent article about FICO scores for mortgage credit ratings was excellent. But a mortgage loan officer recently told me FICO scores can be hurt by having too much available credit. For example, having five unused credit cards of $5,000 each can be just as negative as using that $25,000 of available credit. That's why borrowers shouldn't accept credit card offers unless they are needed.--Jim L.

DEAR JIM: Thanks for that excellent information. Fair, Isaac and Co. (FICO) credit scores rate the probability a borrower will pay on time. Yes, unused credit counts, too.

DEAR BOB: What is the time limit for holding investment or business property before resale? I own four rental fourplexes, which are fully occupied, that were acquired in an Internal Revenue Code 1031 tax-deferred exchange in 1988. How long do I have to hold them before I can sell or exchange them?--Evelyn McC.

DEAR EVELYN: Internal Revenue Code 1031 does not specify any minimum or maximum holding period before investment or business real estate can be sold or traded again. However, one exception occurs if you acquired the property from a close relative. Then, if you sell the property within two years, the profit is taxed back to the former owner.

Since you have owned your rental fourplexes about 11 years, this will not be a problem even if you acquired them from a relative in a tax-deferred exchange. However, if you want to make a Starker delayed tax-deferred exchange, after selling the property, you have 45 days to designate the replacement property and 180 days to complete the acquisition. Meanwhile, the sales proceeds must be held by a third-party intermediary, such as a bank trust department, beyond your constructive receipt.

DEAR BOB: Seven months ago I listed my condominium apartment for sale with a major nationwide real estate brokerage (a four-month listing, which I then renewed for another four months). My apartment was shown a few times but had no serious offers.

In mid-June, my agent showed my apartment to an out-of-state couple. In July, my agent moved to a city about 150 miles away, and another agent took over my listing. Yesterday, this couple phoned me, and I met them at the apartment. They would like to buy it on Oct. 1 (after my listing expires). If I do not renew my listing, am I still required to pay the brokerage firm a sales commission?--Robert B.

DEAR ROBERT: Yes. Most listing contracts include a "safety clause" to protect the listing real estate broker in situations such as yours. Such a clause usually specifies that if the property is sold within 60 to 180 days after the listing expires, to a prospect who inspected it during the listing term, a sales commission is owed.

However, many such clauses require that the agent register such prospects with the property owner. Although the original listing agent probably didn't do that, morally you owe the sales commission because the agent's work was the initial cause of the sale. Without the agent marketing your condo, those buyers wouldn't have learned about it. Don't try to get out of your obligation to pay the sales commission.

DEAR BOB: I am interested in buying foreclosed single-family houses that are owned by the foreclosing lenders. I have read in your articles how people have bought these properties directly from the lending institutions. How does one get access to these REO (real estate owned) properties offered for sale by lenders?--Vincent D'A.

DEAR VINCENT: The REO market is disorganized. VA and FHA usually advertise their REO properties in the weekend classified newspaper ads. Bids must be submitted through approved realty brokers. But other foreclosing lenders, such as Fannie Mae, Freddie Mac, banks and S&Ls, usually list their properties for sale with local real estate brokers who have nearby sales offices.

However, if you contact these lenders with your purchase offer immediately after the foreclosure auction, and if no bidders showed up, you can often obtain bargains before the houses are listed with a broker. A major benefit of buying REO properties is that the lender will usually accept a low down payment and arrange easy financing.

DEAR BOB: When we recently refinanced our house, the title insurance company discovered an outstanding mortgage lien against our title. A distant relative from whom we borrowed $20,000 about 25 years ago refuses to acknowledge that we repaid her loan (regretfully we lost our canceled checks). This relative lives in Turkey, and she is bitter about past events unrelated to the loan.

The title company withheld $20,000, plus $10,000 as potential interest liability. In the past, we obtained a Small Business Administration loan, which said our house was free of any liens. How do we clear up this situation with this relative who refuses to admit to our repayments? Is it legal for the title insurer to hold our $30,000 indefinitely in their coffers without paying us any interest?--Josef and Becky G.

DEAR JOSEF AND BECKY: You need to hire a title insurance lawyer, but before doing that, give the title insurer one more chance. Write a letter to the firm's top administrator for your area. Explain the situation, especially the SBA title policy several years ago. Or, contact another title insurer who might "insure around" that title problem. I've done that several times.

In most states, after 12 months disputed funds must be "interplead" into court. That means after a year the title insurer will interplead your $30,000 and ask the court what to do. However, before that happens, your title lawyer might recommend bringing a quiet title lawsuit to clear your title. In the meantime, you should be able to get the title company to agree to pay you interest on that money.

DEAR BOB: My husband and I refinanced our Virginia home in November 1997. Since we did not have 20 percent equity, we had to have private mortgage insurance. We thought we could cancel the PMI when our equity grew to 20 percent from appreciation in market value.

Recently I wrote our mortgage company to cancel our PMI since we now have more than 20 percent equity. We received this reply: "The loan-to-value cannot be calculated on a new increased appraised value." Since our loan is not owned by "good guys" Freddie Mac or Fannie Mae, what can we do to force our lender to cancel our PMI since we have more than 20 percent equity?--Suzanne B.

DEAR SUZANNE: Your situation shows why borrowers hate PMI so much. A few states have laws requiring lenders to drop PMI when the loan-to-value ratio drops below 80 percent or 75 percent. Congress recently passed a new law specifying when PMI must be dropped, but it is not retroactive. Without statutory help, your best alternative is to refinance again to get rid of your expensive PMI premiums.

DEAR BOB: About 10 years ago, my wife and I formed a trust and bought a California investment property in its name. When we die, our three daughters are to become co-trustees. Inexplicably, while my wife and I were away on vacation, one of our daughters sold the house. Upon our return, we learned of the sale.

How can a real estate broker deal with my daughter to list and sell the house without encountering the trust? The escrow company altered my signature on the documents. When I asked the broker for a copy of the sales papers, he became angry and ordered me never to call him again. Other than hiring a real estate attorney, what regulatory agencies should I inform about this family-splitting matter?--Alfred S.

DEAR ALFRED: Your story is shocking. Run, don't walk, to a real estate attorney's office. You need immediate expert legal help. Be sure to promptly inform the California Department of Real Estate about that California broker's illegal conduct, for which his license should be revoked. In addition, inform the California Department of Corporations about that escrow company. The California Insurance Commissioner should also be notified if title was insured for the buyer based on your forged signature.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.{copy} 1999, Tribune Media Services Inc.