Should you take over someone's mortgage payments?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I have bad credit and can't get approved for a mortgage. My brother-in-law wants me to buy his house from him and just take over his payments. He said the lender won't care as long as I don't pay late. I don't have to put any money down. Is this a good way to buy a house? His mortgage rate is about 6 six percent. - Leo, Mobile, Ala.

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Dear Leo,

Taking over someone else's home loan, even if you have bad credit and can't qualify for your own mortgage, is risky. You're looking at several potential pitfalls.

Lenders don't just let people take over mortgages

On one hand, your brother-in-law is right. As long as the checks keep coming and no one says anything, the lender may not know or care that you have purchased the property.

On the other hand, you could lose the home to foreclosure or end up in court.

Unless your brother-in-law has an FHA mortgage, his loan almost certainly has what's called a "due on sale" or an "acceleration" clause. That means that once the property changes hands, the lender can require that the balance be paid in full within 30 days.

Lenders include this clause because when they approve a mortgage, the creditworthiness of the borrower is part of the package. They don't want to fund bad credit mortgages without knowing it.

Are you likely to get caught? Maybe. Firms like Dataquick sell their monitoring services to lenders. One of those services is looking for changes in utility accounts or public records and advising lenders of possible due-on-sale violations.

Even if the lender doesn't care, you probably should

Okay, let's assume that you're not doing anything sneaky -- you record the sale with the county, and you put the utilities and insurance into your own name. Because you aren't putting anything down, you're not risking anything if the lender decides to foreclose. So why not take your chances?

How well do you know your brother-in-law? Why is he selling the house to you this way? I can think of a few kind of icky reasons:

  • The house is underwater. He knows that he can't get enough for the property to pay off the mortgage unless he can convince you to take over the payments.
  • There are liens against the property. If he has judgments against him or unpaid taxes, there could be liens against the house. If he tries to transact via a traditional sale, these liens will pop up, and he'll have to pay the debts to get the liens released.
  • He might be planning to encumber the home. Until the sale is recorded with the county and the home officially transferred to you, it's still his. If he has enough equity, he could even put another mortgage on it, sucking up an equity that you thought was yours.

If you're intent on buying the home, make sure you do the following:

  1. Buy title insurance, or at least pay for a title search.
  2. Transfer utilities and insurance into your own name.
  3. Record the sale with the county.

I'm not saying that your brother-in-law is a dirt bag. He may simply be trying to save you the lender fees and himself a real estate commission. But play it safe if you go through with this.

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