Selling my rental to my tenant, except there's still 188k on it at 3.9%

Wait, you can sell a house that still has a loan on it without paying the loan off? I thought the bank got paid at closing automatically. What am I missing here?

@rigging normally the loan is paid off out of the sale proceeds at closing, that's the standard path. What halyard is describing is leaving it in place, which is a different animal.

Halyard, the tripwire is almost always the insurance. Your policy is going to change names and the mortgagee clause notice goes to the servicer, and that is how the transfer becomes visible. Also the tax bill switches names in the county records. Don't build a plan that depends on nobody noticing.

Underwrite her, not the story. Five years of documented on time rent at whatever she's paying now is better performance data than most lenders ever see, so use it. What's the current rent versus the 2,455 payment plus taxes and insurance? If she's going from 1,900 to 3,000 all in, five years of clean history at 1,900 tells you very little about 3,000.

Then get 14 months of business bank statements and whatever return exists, and calculate her actual coverage. Self employed 14 months means a full year of returns is close. Which is also the answer to your third question, in six years she has seven and a half years of self employment history and if the business survives she's bankable on income documentation. The risk is the business, not the calendar.

Why not just have her put the 41k toward the 188k and finance the difference somehow? I know that leaves 147k, I'm just not seeing why the existing loan has to stay whole.

@pike because she's buying at 410 and paying 41 down, the 41 is her equity contribution, not a payment against halyard's debt. The 188k either gets paid off from proceeds halyard doesn't have or it stays.

Halyard, run the two columns. Column A, you sell conventionally at some point for cash, pay off 188k, net maybe 195k after costs, redeploy at whatever you can get. Column B, you keep the 3.9% loan and collect 1,275 a month of spread plus principal reduction on both sides, and you carry the risk that the loan gets called and the risk that she stops paying. 1,275 a month is 15,300 a year against roughly 195k of trapped equity, so call it 7.8% on the equity plus the amortization. That is a real number. It is not so much better than alternatives that I'd take an acceleration risk I haven't priced. Get the attorney to price it first.

There's a middle version people use where the buyer's note is written to include the underlying loan and a servicer pays the senior lender directly out of the buyer's payment, so you're not the one who forgets a month. Whether that's a normal instrument where your property is, and how it interacts with your section 18 language, differs by state, so that's a question for the same attorney call rather than something to settle here.

Reading your post, the thing you actually want is the 3.9% loan, and the sale is the way to keep it earning. Fine, that's a real motive. But say the balloon arrives and she can't refinance because the appraisal comes in short or her business had a bad year. What do you do then, at 62 or whatever age you are, with a tenant who is now a borrower living in a house you'd have to foreclose on? I'd want to know my answer to that before I'd want to know the spread.