WOW....question about owner financing during bk7

[berrymom31]

Okay, we have been on a wild roller coaster ride the last week or so. Some of you may remember that we are giving up our house and dh's parents had offered to buy us a house and let us rent it....as decent rentals in our community are very hard to come by. We found a wonderful house that an older couple owned that had belonged to one of their mothers. This house is in a nice neighborhood and is right next door to the elementary school...we walked from the front door of the house to the front door of the school and it took less than one minute!

Anyway, this couple put 60,000 worth of work into this house and it's beautiful..small but lovely..and dh's parents put an offer on it...it was only 108,000. The mortgage "rent" was only going to be 866 and we were pleased with that. Well, the loan for dh's parents was going good, but it was FHA and there was so much paperwork and the closing costs and downpayment were killing us, but we figured were not making anymore mortgage payments so we could swing coming up with the cash. Well, the owners of the home..this was FSBO....caught wind of all the cash we were having to come up with and then guessed our situation...that we were losing our house and BK...and then offered to owner finance us at 6% interest, no money down and only $686 per month! We were in shock and these people are so nice and trusting and love our kids and said they just really want a family in the house. This all happened last night and I cried all night over their kindness..as this has been a stressful few months and my emotions got the best of me...

So, my question is..how will this effect the 7 we are filing in 8 months after I quit my job and we lower our income to qualify. Will it be considered a rent or a mortgage? Do we disclose this situation to our atty and the trustee? I don't believe there is much if any equity in the house.......thanks for your help!

[justplaintired]

Talk to your attorney that's why you hired him. He has to know everything in order to file your case. Your new payment, be it rent or purchase would be included in your means test. Your trustee will see when you file. Your current mortgage payment once you walk away from the house will not longer be included in your means test, only your current payment. Find out what if any equity you will have in the new place and make sure your fall under on your equity for your state, otherwise you could have an issue with that, unless ofcourse your renting in which case you don't have equity, the home owner does.

[hnhlvr]

What great news! Best of luck.

[Help!]

You definitely should talk this over with your lawyer. When you file your petition, you will be required to disclose any outstanding contracts. I'd steer clear of this arrangement as you've described, and any other arrangements that complicate your finances. The goal in an above median Ch. 7 is to quietly move through the process and to draw as little attention and scrutiny as possible.

It sounds like you love this house (and I really do understand). There will be others, and a year from now there may be even better deals. Since you've been living with a lot of debt and probably haven't had a truly comfortable budget for a long time, don't you want to see what that freedom is like before taking on the responsibility of another home... with its taxes, maintenance, repairs? Wouldn't it be nice to have a big, fat savings account under you first so you can handle anything life throws at you?

If you're going to proceed with this, at least consider signing a lease agreement to rent it from the couple (with your names) and a separate purchase agreement (with only DH's parents' names). That way, you'd have a lease agreement that shows you're paying rent to this couple the way you would anyone else, and the purchase details would be on a separate contract to which you are not a party.

You mentioned how emotional all of this is for you, and that indicates to me that this may not be the time for you to make an important financial decision that will affect you for years to come. There is no hurry here... step off the roller coaster, focus on getting through the coming months and your BK. When things have settled down and you're as level-headed as can be, that's the time to buy a home. Impulsive decisions are usually not good ones.

[berrymom31]

The payment on this house is $200 cheaper than the rent we would be required to pay for a place to live....so basically we feel this will save us money. It's not about the house...it's about the cheapest place to live at this point, and simplifying our life. Our atty said it was a good idea to rent a house at $885 per month, so I don't see the difference at this point.

This has been emotional, but we do feel this is a good decision to make. We are going from a $240,000, 2,300 per month payment to a 108,000 $680 payment. we are also reducing our income by $3,000 per month and 25,000 per year. Dh is also cutting back on call and hours, so we can ensure we will meet the median as close as possible. At this point our atty thinks we will only be 1 or 2 thousand over, if that. There is 3,000 equity in this house.

[AngelinaCat]

It sounds like a good deal for you, but I like Help!'s idea about the lease agreement and purchase agreements being seperate and on paper so you have a paper trail for the Trustee. Good luck. I hope this all works out for you, and right before school starts, too!

[erinmi]

I guess I would just make sure that if you do the owner financing, you find out if they already have a mortgage on the property.

If they do, make sure they are not behind on their payments because I have heard of more than one case in our area where the owners were in foreclosure or didn't make mortgage payments with the buyer's payments to them, thus screwing the buyer.

If they don't have a mortgage, I would definitely say go for it with your attorney or a real estate attorney's help in doing the paperwork to make sure it is all legal etc.

[hnhlvr]

Erinmi makes a good point about the status of the current mortgage.

There was a house for rent a few months back that I was watching on CL and considering calling about but didn't and then later I was scanning the foreclosure websites and found that during the time that house was on CL it was also already being foreclosed on!

[Help!]

Our atty said it was a good idea to rent a house at $885 per month, so I don't see the difference at this point.

Yes, it is a good idea to rent a house. If you buy a house, you are going further into debt. It's not about the amount of the monthly payment, it's about taking on more debt. There is a world of difference.

[fltoo]

Owner financing is just about the best mortgage anyone could get!

This is long term so I would work the BK around this loan and not the other way around.

You need to be careful with a few things though.

You need to hire a real estate attorney to handle the contract, a lien search, and review the terms of the loan.

Make sure there is no balloon payment at the end of a few years as you would have to refinance again.

If the owner agrees to a certain interest rate, term(years for the loan) and the lien is not clouded, I say, go for it.

Since it is an older couple, I would also have attorney put in some verbage as to what happens if the owners die before the end of the term.

This is a contract for purchase with owner financing and is not a lease. Make sure your attorney covers all the bases just as he would if a bank was the lender.

Also, when you are in a title state, you get the deed to the property even thought the house is not paid off. Make sure title is transferred to you and the owner does not maintain it.

When you do the loan, you might want to make the mortgage payment higher than the stated 600. or so.
Just shorten the term and you can get the payment to 800-900 if needed for your BK. Your attorney will work out the numbers for you.

btw, I would use a RE attorney for this, not any Joe Schmo.