When it comes to a property that’s been financed with a mortgage, homeowners can experience the need or desire to live elsewhere from time to time. Renting may be considered as a way to recover some of their costs when they are not using their home.
In some cases, homeowners – when acting as landlords – may also consider that it’s more efficient to have the tenant pay their monthly mortgage payment directly to a lender. After all, the money is just being received and turned over in another check to the lender anyway. It may seem like a logical idea to skip the two-step hassle but, in reality, it’s not a great idea.
Equity Matters
First off, one has to understand and remember what a mortgage payment actually does; it pays down financing debt which in turn creates equity in the home. Typically, that means that the owner’s payment shifts more of the clear title to his name and lessens the lender’s collateral lien.
However, if a third party gets involved, the legal title to the home can get complicated. From some legal arguments, it could be interpreted that the owner is letting a third party buy into the equity in the home. That may not necessarily be the case, but when money gets exchanged, it can be a very powerful element in the legal world.
Lenders Are Not Fond of Assumptions
To prevent potential title problems, most mortgage lenders refuse to let a borrower allow a third party to assume their mortgage loan. Instead, the original mortgage needs to be paid off to release the collateral lien on the given home to the homeowner responsible for the purchase.
However, not every home loan provider includes the right language in their loan contracts. Some even make it possible for a third party assumption to occur. If that happens, regardless of what the original homeowner wants, the third party could then make an argument that they now have equity title of the home and the basis for lien if taken to court. While this could be thought of as an extreme situation, weirder things have happened in a court room.
Keep It Separate
To avoid any kind of title confusion from occurring, it’s best to simply not let the tenants have anything to do with the mortgage on the home or the lender. Period. Collect their rent and then issue an entirely separate check payment to the mortgage lender. This keeps the equity title clean and the tenants remain just that, temporary occupants of the property and nothing more.
As you can see, precautions are often taken to protect the homeowner and the lender but that is not always the case. The best thing you can do is talk to your trusted real estate professional about this issue and others to ensure the long term protection of your valuable asset.
