Home seller offers to hold balloon mortgage
Dear Ms. Lank: We want to buy a house in East Rochester, New York. The owner is an old man who lives next door to it. He says he’ll lend us the money to buy at a low interest rate and hold a balloon mortgage instead of us going for a bank loan. The price looks right.
Is this a good way to buy? What should we watch out for? -- N. R. P.
Answer: Two separate things are involved here: the seller holding the mortgage and that mortgage having a balloon.
I can think of several reasons he might offer to hold a private mortgage instead of having you get a regular bank loan.
It could be that he’d prefer regular income to receiving a lump sum. Even at low interest, these days he’d be receiving more than if he were to put the sale proceeds in a savings account. And he may have some income tax advantages.
Or perhaps you have unusual financial circumstances (just starting your own business, for example) that don’t let you qualify for a normal bank loan. One advantage: You might avoid some of the usual closing costs of placing a mortgage with an institution.
But -- this is one to watch out for -- perhaps the condition of the house wouldn’t meet bank standards and he doesn’t want to make the necessary repairs. To protect yourselves, you could make your purchase offer “subject to a satisfactory report from a home inspector.” Then, if you decide to go ahead anyhow, you’d know what you were getting yourselves into.
Now, about that balloon: Your payments would be set at a 30-year rate, something you could handle. But since he’s elderly, perhaps he doesn’t like the idea of waiting that long to collect the whole purchase price. So at the end of, say, 10 years, the balloon bursts. Whatever you still owe would be immediately all due and payable.
Because most of each monthly payment goes toward interest on the loan in the early years, you won’t have reduced the principal much in 10 years. You’d still owe about 90 percent of the original purchase price. That final balloon payment would be a big one.
How would you meet it?
Your financial situation might be straightened out by then; the house should have increased in value; and you’d be borrowing somewhat less than original purchase price. So you’d place a new mortgage with a regular lending institution.
Or who knows? The old gentleman might still be in good health and so dependent on your prompt and regular payments that he would offer to renew the loan.
About Tenant’s Junk
Dear Edith: More than a year ago, a tenant left my rental property without warning; he still owed that month’s rent and, as he left in the middle of the month without notice, the following month’s rent. He left the apartment a complete mess. His dog had ruined the living room carpet. And his water bill remained unpaid. He also left behind two riding lawn mowers, one completely disassembled and the other in need of work. He left tires as well. And the place required a month of my time after work to make it suitable for another tenant.
I took him to small claims court and was awarded a little more than $1,200, which, of course, he never paid. So I went to civil court and garnisheed his wages. He has now paid me about $700.
He recently asked for his mower back, this after 18 months. My lawyer says he doesn’t have a right to the mower. I’d like to charge him a monthly rental fee for it and insist that he remove the tires, which I’ve stored in a shed. Any advice you could provide would be appreciated. -- askedith.com
Answer: Sorry you haven’t set up a system for checking would-be tenants’ credit ratings in advance. You could ask them to bring a credit report with them. If it’s bad, they’ll probably just disappear. Another prospective landlord ploy is finding some excuse to look at the interior of their car, which can sometimes give you a clue to their housekeeping style.
Glad to hear you are getting information from your attorney.
I’m impressed that you followed through in civil court.
And thanks for writing to me, but here comes the cop-out: All I can offer you is sympathy. By all means, take your guidance from that lawyer.
Contact Edith Lank at www.askedith.com, at email@example.com or at 240 Hemingway Drive, Rochester NY 14620.
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