Dear Gina: Is Owner Financing an Option for Bad Credit Buyers?
By Gina PogolMortgage Credit Problems Columnist
Earl K. Asks: We are renting our house and want to buy it. We have bad credit and would be unlikely to be approved for a conventional loan. The owner said he would finance it, but we just found out he has a mortgage on it! Is this legal?
Gina Says: It depends. Most mortgage loans (except for FHA and VA loans made before 1990) have what's called a due on sale clause. It may also be called an assumption clause, an alienation clause, an acceleration clause, or a call provision. That means that when someone sells property, any lenders with liens against that property must be notified. Lenders generally require then that the mortgage(s) against the house be repaid. The Garn-St. Germain Depository Institutions Act of 1982 says these clauses are enforceable and that in most cases hiding the transaction from the lender is illegal.
17. Transfer of the Property or a Beneficial Interest in Borrower. If all or any part of the Property or any interest in it is sold or transferred (or if a beneficial interest in Borrower is sold or transferred and Borrower is not a natural person) without Lender's prior written consent, Lender may, at its option, require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if exercise is prohibited by federal law as of the date of this Security Instrument.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
If Lender exercises this option, Lender shall give Borrower notice of acceleration. The notice shall provide a period of not less than 30 days from the date the notice is delivered or mailed within which Borrower must pay all sums secured by this Security Instrument. If Borrower fails to pay these sums prior to the expiration of this period, Lender may invoke any remedies permitted by this Security Instrument without further notice or demand on Borrower.
So if you bought this property, the current owner's bank could call the loan and take the house back. I would never recommend buying a house this way--it leaves you with no protection if the sellers default on the mortgage. How would you feel if you went to refinance your mortgage and discovered that you didn't legally own the home? Or that your landlord had put a home equity loan on it? The bottom line is that your landlords probably can't sell to you and keep their mortgage without concealing the transaction from their lender. And if you participate, for example by allowing them to keep the homeowner's insurance in their name, you could be prosecuted as well.
In general, you should never do anything that cannot stand the full disclosure test. That is, if the deal could not be completed without everyone involved, including all lenders, knowing everything that's happening, it's probably unethical and maybe illegal. What the current owner of the home is suggesting can't likely be done unless the existing lender is kept in the dark about the change in control and occupancy of the property.
A better idea is to spend some time checking out bad credit options for your mortgage, or speaking to a credit or housing counselor at HUD and finding out what you have to do to be approved for a mortgage. Then buy that house.
About the Author
Gina Pogol has over a decade of mortgage lending experience, in addition to practice as a paralegal for a bankruptcy attorney, and as a business credit consultant for Experian. She is also certified to underwrite Fannie Mae loans. She earned her BS in Financial Management from the University of Nevada.
All information provided “as is” for informational purposes only, and is not financial advice. MortgageCreditProblems.com, its affiliates, and any of the independent providers of information on this site shall have no liability for any informational errors or incompleteness, or for any actions taken in reliance on information contained herein.
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