If you’ve recently become a landlord and have started leasing your property to a tenant it is very important to understand the dangers of allowing your tenant to directly make mortgage payments. Knowing the dangers will help you avoid any future challenges you could face.
Allowing your tenant to pay your mortgage may seem convenient however it’s good business sense (and common sense) to avoid it completely for a number of reasons.
Firstly you have to understand what a mortgage payment actually does. It pays down financing debt which then creates equity in the home. As an owner you’re shifting the clear title to your name and away from the lenders collateral lien. If you allow your tenant to make these payments, the legal title to the home may be questioned. From a legal argument it could be interpreted that you are allowing a third party to buy equity in the home.
Lenders Are Not Fond of Third Parties
To prevent these challenges many mortgage companies do not allow third parties to make payments on the mortgage. Instead, the original mortgage needs to be paid off to release the collateral lien on the home. However there are some mortgage companies that may allow third parties to make payments. If this is the case your options as a homeowner may be limited. If the case ever makes it to court, your tenant could argue they have equity in the home since they’ve been making direct payments to the lender.
Although this is an extreme case you would be better off simply making payments yourself. This ensures title to the home cannot be questioned and your tenant remains just that, a temporary occupant of the home and nothing more.
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