When it comes to a property that’s been financed with a mortgage, many homeowners can have a need to be elsewhere from time to time and see renting as a way to recover some of their costs when not using their home. And in some cases, some homeowner-landlords may decided its probably even more efficient to have a tenant who just pays their mortgage monthly payment directly to a lender since the money is just being received and turned over in another check anyways. So why bother with a two-step hassle when the tenant can pay the same amount directly while the owner is away? It seems to make common sense to let a tenant assume a mortgage payment on a home but it’s a bad idea for a number of reasons.
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. That means typically the owner’s payment shifts more and more of the clear title to his name and less from the lender’s collateral lien. However, if a third party gets involved, then legal title to the home can get messy. From some legal arguments, it could be interpreted then that the owner is letting a third party buy her way into the equity in the home. That may not be the case, but when money gets exchanged, it can be a very powerful element of exchange in the legal world.
Lenders Are Not Fond of Assumptions
To prevent the title problem, most mortgage lenders refuse to let a borrower allow a third party to assume a mortgage loan. Instead, the original mortgage needs to be paid off to release the collateral lien on the given home. However, not every home loan provider includes the right language in their loan contracts, and some make it possible for a third party assumption to occur. If that does happen, regardless of what the original owner wants, the third party could then make an argument she now has equity title of the home and the basis for lien if taken to court. While this is an extreme situation, weirder things have happened in a court room.
So, to avoid any kind of title mess from occurring, it’s best to simply not let tenants have anything to do with a mortgage, period. Collect their rent due and then issue an entirely separate check payment to a mortgage lender, having nothing to do with the tenant. This keeps equity title clean and the tenant remains just that, a temporary visitor to the property and no more.