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Mortgage  Question?
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Rental Tenant Responsible Mortgage Missed Payments

We own a rental property that we are selling to the tenant. We hold the mortgage but the tenant makes the mortgage payments directly to the lender. The tenant has missed several payments. How do the missed payments impact me when I apply for a mortgage?

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

The situation you described creates challenges for several reasons. First, if the mortgage on the rental property is in your name, you are legally responsible for that mortgage even if you do not make the monthly payments, and that monthly mortgage payment is included in your debt-to-income ratio when you apply for a mortgage on the home you want to buy.

If you want to include income from a rental property to offset your monthly obligation when you apply for a mortgage, lenders typically require documentation such as tax returns for the prior two years to verify the income. Lenders request the Schedule E for the property from your tax returns for the prior two years to determine if the property generates a profit, loss or is break even. If you cannot verify the rental income by providing tax returns for the prior two years, then the income is typically not included when you apply for a mortgage. In this scenario, the lender includes the monthly mortgage payment on the rental property in your debt expenses but does not include the rental income in your monthly income, which can make it challenging to qualify for a mortgage. It sounds like the property tenant pays your mortgage directly instead of making monthly payments to you, which means you probably do not report those payments on your tax returns.

While the issues outlined above are challenging you may be able to overcome them. First, you should document the agreement you have in place with the property temamt and also try to re-create a paper trail that documents any payments made by the occupant to you or the lender on your behalf. In these situations, lenders want to see a paper trail that supports any agreement you have in place. Additionally, I would draft a letter that summarizes the agreement you have with the property occupant and addresses the missing payments. Ultimately, if the mortgage is in our name you are responsible for the missing payments but the letter should help explain what happened. The letter should be factual and concise.

Please note that if you sold the property and offered seller financing, then the seller loan and missed payments would not show up on your credit report.

My best recommendation is that you contact multiple lenders and get pre-approved for your mortgage. You can review your situation with lenders to determine the best approach given the issues outlined above. You can review lenders in your area by clicking INTEREST RATES We advise you to contact at least four lenders as qualification guidelines vary. Plus, shopping lenders is the best way to save money on your mortgage.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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