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Our tenants would like to buy our house. Their credit score is not high enough for a nothing-down mortgage, so we are looking into holding the mortgage ourselves. They have lived in the house for about six years and have always paid their rent, so we expect they would also make their mortgage payment.
Questions:
1. PMI - is PMI available when the lender is not a financial institution?
2. Is there any reason we would not be able to include taxes, PMI, and homeowners' insurance in the mortgage payment and hold those amounts until they are due to be paid?
Not sure if PMI is available if an individual is a lender. Just be aware that there are specific regulations about disclosure, how much you can charge, how long you can charge PMI and when you have to remove it. You could also consider charging a higher interest rate to cover your risk. With bad credit, they're already a risk worthy of a higher interest rate.
I see no reason why you couldn't hold an escrow account. It will mean more docs and you will assume liability for payment of those items. You can also require them to pay directly, provide evidence of payment and copies of insurance docs, and make it a default if they do not. You need to speak with a real estate attorney about these things and more, especially doc drafting, but mostly to protect yourself. You should also discuss whether a land contract or mortgage is most appropriate. Land contract rules can differ by state, and may offer a faster foreclosure process if ever needed. You'll need to be sure to treat this as a business transaction, with all the appropriate docs and that the note and mortgage are recorded.
You should also discuss whether a land contract or mortgage is most appropriate. Land contract rules can differ by state, and may offer a faster foreclosure process if ever needed.
This is an important point. If you're doing Seller financing it is generally preferable to do a Land Contract (aka Contract for Deed or other name) since it is usually easier to foreclose on a Land Contract. With a Land Contract, the Deed isn't conveyed until the contract is paid off in full.
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