Rural sub-to at 3.25% with the seller two payments behind. Plan B is unpriceable.

210 a month is not income, it's a rounding error with a septic tank attached. One vacancy at 45 days and you've eaten a year and a half of it. I get that the 3.25% is the prize, but the prize only pays you if the property performs, and 1,300 rent in a town of 4,000 sounds like a number that has to go exactly right.

1996 build, so you're probably looking at original well pump if it hasn't been swapped, and pumps go at 20 to 25 years. Budget 1,800 to 3,500 for that alone depending on depth and whether the pressure tank goes with it. Septic pump and inspect before you close, and if the drain field is undersized for a 3 bed you'll find out at the worst possible moment. None of that changes your rate story, it just means your 22,500 in is really more like 27,000 in and your 210 a month is really zero for a couple of years. Get the inspections before you argue about the equity number, because they're your best argument on the equity number.

Three things in your post are separable and you're treating them as one.

First, the arrears. Reinstating a delinquent loan and taking title subject to it are different transactions with different failure modes. A loan that is already in default gives the servicer a live reason to look at the account, and a change of ownership is easier to notice on an account someone is already reviewing. That doesn't make it unworkable, it means your call risk on this file is higher than on a current loan, and your reserve should reflect that rather than a generic number.

Second, the insurance. When ownership changes, the policy has to change with it, and how that change reaches the lender varies by carrier and by servicer. Some lenders learn about a transfer through the insurance binder before anything else. Ask your agent, in writing, exactly what the carrier reports to the mortgagee and when.

Third, the Plan B. You've priced it correctly in structure and not in time. A refinance demand typically comes with a stated period to perform, and small rural DSCR paper on a 1.19 coverage ratio is thin, so your realistic exit is a sale, which you say runs six to nine months. Reserves that cover only the payment miss the point. You need to carry the payment plus the carrying cost of a marketing period.

On your actual decision: carrying part of her equity on a note behind the existing loan keeps cash available for exactly the scenario you're worried about, and it also gives her a reason to stay responsive. It also creates a second lien and second set of documents, and recording practice and transfer tax treatment differ by state. Have an attorney licensed in that state draft it.

I'm reading this twice and still stuck on something basic. If she's two payments behind and moving anyway, why doesn't she just list it? At 198,000 against a 148,400 balance there looks like real equity there, more than the 18,000 she's asking. What am I missing?

@juniper the acreage and the location, probably. Six to nine months on market with two missed payments already means she might not have six to nine months.

My question is different. Her name stays on that loan for 22 years. If hollow ever stops paying, that's her credit, and she's trying to buy something in a new city. Does she understand that in a way she could explain back to you, hollow, or does she just understand it enough to sign?

@marlow is right about the thin spread and wrong about the reason it matters. On my small multis the killer isn't the monthly, it's that a thin monthly means every capital event comes out of your pocket instead of the property's. A well pump at 3,000 is 14 months of your entire cash flow.

What I'd actually want to know: what did the two acreage comps sell for per acre with the improvement backed out? If the 5.1 acres carries real value on its own, your downside on a forced sale is better than your rent math suggests, and that changes how much reserve is honest.

Five acres in a town that small is worth what one buyer thinks it's worth on the day you need to sell, so I wouldn't lean on @cairn's angle too hard without knowing how many acreage sales happen there in a year. Two in fourteen months is not a market, it's two events.

I'd do the deal differently or not at all. Pay her 6,000, carry 12,000 on terms with no payments for 24 months, and put the difference in reserve. You keep the rate, you keep the cash, and she gets out from under the arrears now, which is what she actually came to you for. If she won't take that, the deal is telling you she needs 18,000 today, and a seller who needs 18,000 today is a seller who might need something else from you in year three.