We use an “Addendum to Loan Application” form that asks borrowers to indicate whether anyone other than the borrower can claim a homestead interest in the property securing the loan. Can a borrower claim a homestead interest in a property that will be used as a second home? Also, in the case of a father and a daughter applying for a home loan, where the daughter and her husband will live in the home, should the daughter answer “yes” to the question of whether anyone other than herself can claim a homestead interest in the property, and should the father answer “no” to the same question? The father and the daughter will both be on title to the property, but the husband will not.

In our view, it is unlikely that a debtor would be able to successfully claim a homestead interest in a second home that is not used as a principal residence. However, because Illinois law is unclear on that point, we believe it would be prudent to nevertheless obtain a waiver of the homestead exemption from a borrower mortgaging a second home.

In Illinois, an individual is entitled to claim a homestead interest in property “occupied by him or her as a residence” of up to $15,000, which is protected from creditors unless the borrower agrees to a waiver. Unlike several other states’ laws, Illinois law is silent as to whether a homestead interest is available only in an individual’s principal residence.

We are aware of an Illinois bankruptcy court case that appears to tacitly confirm that the homestead interest is unavailable in second homes or vacation homes. The court held that a debtor could claim a homestead interest in a boat used as a residence outside of the winter months, because he intended to return to occupy the boat as his principal residence when the weather improved. The court distinguished this case from a New York bankruptcy case in which the debtor was ineligible for a homestead interest in a vacation home that was not his principal residence, which suggests that the court would not have allowed the debtor to claim a homestead interest in the boat if it was not his primary residence. Additionally, an Illinois appellate court has described the intent behind the homestead exemption as “protect[ing] persons from losing their primary residences,” but that decision has been overruled on other grounds by the Illinois Supreme Court.

These cases suggest that Illinois courts are unlikely to allow debtors to assert homestead interests in second homes not occupied as a principal residence. However, in the absence of stronger cases supporting this conclusion, we believe that banks may wish to require borrowers to waive their homestead interest in second homes.

Regarding the scenario with the father and the daughter, we believe that both borrowers should indicate on the Addendum to Loan Application that someone other than themselves can claim a homestead interest in the property. The daughter should indicate that her husband may claim a homestead interest in the property, and the father should indicate that both his daughter and her husband may claim a homestead interest in the property. Although the father cannot claim a homestead interest in the property, since he does not intend to use it as his residence, it still would be accurate for him to indicate that his daughter and her husband both may claim a homestead interest in the property.

For resources related to our guidance, please see:

Illinois Code of Civil Procedure, 735 ILCS 5/12-901 (“Every individual is entitled to an estate of homestead to the extent in value of $15,000 of his or her interest in a farm or lot of land and buildings thereon, a condominium, or personal property, owned or rightly possessed by lease or otherwise and occupied by him or her as a residence, . . . That homestead and all right in and title to that homestead is exempt from attachment, judgment, levy, or judgment sale for the payment of his or her debts or other purposes and from the laws of conveyance, descent, and legacy, except as provided in this Code or in Section 20-6 of the Probate Act of 1975. This Section is not applicable between joint tenants or tenants in common but it is applicable as to any creditors of those persons. If 2 or more individuals own property that is exempt as a homestead, the value of the exemption of each individual may not exceed his or her proportionate share of $30,000 based upon percentage of ownership.”)

Conveyances Act, 765 ILCS 5/27 (“No deed or other instrument shall be construed as releasing or waiving the right of homestead, unless the same shall contain a clause expressly releasing or waiving such right. And no release or waiver of the right of homestead by the husband or wife shall bind the other spouse unless such other spouse joins in such release or waiver.”)

Property Tax Code, 35 ILCS 200/15-175(h) (“‘Homestead property’ under this Section includes residential property that is occupied by its owner or owners as his or their principal dwelling place, or that is a leasehold interest on which a single family residence is situated, which is occupied as a residence by a person who has an ownership interest therein, legal or equitable or as a lessee, and on which the person is liable for the payment of property taxes.”)

In re Ross, 210 B.R. 320, 323 (Bankr. N.D. Ill. 1997) (“The purpose of the estate of homestead and the exemption is to secure the debtor and his family the necessary shelter from creditors. One way for the homestead exemption to be lost, other than by conveyance or release, is by abandonment. Generally, a removal from the homestead premises will be taken as an abandonment unless it clearly appears that there was an intention to return and occupy them.”)

In re Ross, 210 B.R. 320, 323 (Bankr. N.D. Ill. 1997) (“The evidence was undisputed that the Debtor reestablished his homestead or principal residence from the former marital home in East Dundee to the Boat moored in Waukegan in Spring 1996, and lived there until the winter weather onset in late 1996 when the Boat was drydocked until Spring 1997, at which time the Debtor moved back onboard and continues to live to date. Thus, he lives on the Boat approximately eight months of the year and only left temporarily with the intention of returning. As Illinois snowbirds who annually migrate South for the winter do not lose their homestead exemptions in traditionally improved real estate they use as their principal residences, if they intend to and do return, so should a similar result obtain for Illinois boat-dwellers who temporarily move on land during the icy winter months.”)

In re Ross, 210 B.R. 320, 324 (Bankr. N.D. Ill. 1997) (“The principal case relied upon by the Trustee, In re Miller, 103 B.R. 65 (Bankr. N.D. N.Y. 1989), which applied New York law, is distinguishable on its facts. That case turned principally on the fact that the property was a vacation home not actually occupied by the debtor on a regular basis, and thus was found not to be his principal residence. Functional and actual usage of the dwelling was the paramount concern in Miller, as is the case here. Miller noted by way of dicta that a boat or similar dwelling is not precluded from being considered a principal residence as long as it is occupied as such by the debtor.”)

E.J. McKernan Co. v. Gregory, 268 Ill. App. 3d 383, 391 (2nd Dist. 1994), overruled on other grounds, Premier Prop. Mgmt. v. Chavez, 191 Ill. 2d 101, 111 (2000) (“[T]he policy concerns behind both the section 12-901 exemption and the tenancy by the entirety is the same. They protect persons from losing their primary residences.”)