"It was scary," says Petersen, "because I was afraid that the bank would find out and call in the note. I think that since they received their money every month, what we did either wasn't noticed or wasn't addressed."
But not every third-party arrangement is on the up-and-up. Homeowners should be wary of anyone who offers to take over their mortgage payments if they sign over the deed to their house. "In the past two years there have been a high number of these scams, known as deed theft," says Alyssa Katz, author of "Our Lot: How Real Estate Came to Own Us." "The buyers get their own loan or cash out, then walk away, and the seller doesn't realize what happened until it's too late," says Katz.
Installment plansA less precarious way to sell your home to a buyer who will take over your payments is with an installment land sale contract, installment loan plan, lease option to buy or rent to own. The types of agreements and stipulations vary from state to state.
"With an installment land sale contract the seller keeps (the) title to the house and doesn't transfer it to the buyer until the mortgage is paid off," says Jerry F. Childs, attorney at law at Kahn, Soares & Conway in Hanford, Calif. The seller also continues to make their usual monthly payments to the mortgage company.
It may sound simple, but Childs strongly recommends that homeowners seek competent advice by a professional eligible to practice in the state where the transaction will occur. "When something appears to be safe and a good idea, there should be an increased amount of concern," Childs says. "Shortcuts are typically the most risky."
He says that a few of the things sellers should be aware of include buyers who stop making payments and those who earn an equity interest in the house or have made improvements. The latter two could become a problem if the contract ends and the buyer will not be receiving the title.
Katz recommends that sellers find out if their loan stipulates that they must occupy the house and if the rental laws in their state have a cap on how long a rent-to-own type of agreement may last. The cap could be less than the life of the seller's loan. Ideally, the buyers will apply for their own mortgage within a few years, and these types of arrangements can actually help them to qualify.
"A lot of banks ask for verification of rent from a landlord, if there is one," says Devery, who explains how buyers and sellers can take this a step further. For example, if the mortgage payment is $1,500 but the buyers pay $2,000 per month with the extra $500 going toward a down payment on the house, it will show the bank that they can afford the mortgage and were able to save for a down payment too. This could increase their chances of qualifying for their own loan.
What's in it for the buyer?There are other reasons why a buyer may agree to assume someone else's loan. The current interest rates may be higher than the seller's loan. Or if the property appreciates, the buyer may earn equity if the sales price will be the balance of the loan or the home's value at the time the papers are signed.
Rhonda Mannix and her husband saved almost 2 percent off the current interest rate when they assumed their seller's FHA loan in Northfield, Minn., in 2005. "By the time we saved enough of a down payment to buy a house, we were priced out of the market and needed a bigger down payment in order to afford to buy. Saving on interest is what made homeownership possible for us," says Mannix.