Expert: Dick Dennis - 5/5/2006

Question
My husband and I purchased a home for his parents that they had been leasing for 17 years.  Due to illness, they were unable to acquire the funding to purchase the home in their names.  We now own the home and they are leasing it from us for the cost of the mortgage.  We would like to get out of owning the house, but we know that we cannot sell this home out from underneath them because they really have nowhere else to go, and most likely could not get the financing on their own.  I feel confident that they can make the mortgage payments so we would like to possibly give them a Quit Claim Deed, so the property would no longer be in our name.  When you use a Quit Claim deed to transfer ownership of property to a family member, does the family member take over the loan, and if they were to default on the loan, who is responsible for payment? Does the mortgage lender have to approve the transfer?  

Answer
There are two ways (actually three) to handle this, Misty. I prefer the third one.

Never use the Quit Claim when a Warranty Deed (or Grant Deed, depending on your state) will do better. When you bought the property you were given one of them. Simply convey the property to your husband's parents.

There's a big but, however.  YOU are still responsible for the mortgage. So, you would have to monitor it to make sure that they are up to date on not only the mortgage but also the property taxes and insurance. You could, however, have them send you the monthly payments as before, but then you make the payments to the mortgage company. If the lender should discover that you are not the owners of the property, they COULD call the loan due and payable and/or put the property into foreclosure.

But be assured that lenders would rather NOT go that route as long as the payments are on time each month. Further, the insurance company is usually the source the lender uses as to who is the owner of the property because the insurer needs to know who to pay off in case of a fire . . . the lender. The insurance company should put your name on the additional insured, too, because you are responsible for that loan. It makes no difference if it is a family member or not.

So, as long as your husband's parents are making the payments and there is no claim on the insurance, you should be able to get along without worrying too much about the lender.

Number two is to sell the property to someone who guarantees that they will never raise the monthly rental. They will merely gain any value in the property over time until the parents pass or until they enter a assisted living somewhere. But your parents still must maintain the property as before . . . until they no longer can, then you have to step in and do it for them.

Now you see why I prefer the first one. IN any case, I strongly suggest you have this whole matter put together by a REAL ESTATE attorney. Believe me, the cost will be well worth it. While you're there, investigate if a living revocable trust is valid in your situation. A living trust will be under the parents name with you as substitute trustee upon their passing. There's lots more to this, but I think this way is by far the best way to go. No lender is going to care as long as the payments are on time.

I do wish you well. Misty.

Dick Dennis       dixiedee13@aol.com