Urgent issue w/rental property & downpayment assistance program

18 Replies

Hey Everyone.  My wife bought her house in Maryland in 2004.  She used a downpayment assistance program through the county.  I moved in, in 2010 and we got married in 2012.  Last year, we decided to move to California.  We looked up the terms of the program online and it said that the amount would have to be paid back if we sold the house.  We planned to rent the house, so we weren't worried.  As we were packing up to leave we found her original contract which stated that we'd have to pay the full amount back immediately if we rented it out as well.  We tried to find out whether we could pay it back in installments without alerting the program that we were leaving etc. We weren't able to get a conclusive answer so we took our chances and rented anyway since we were already packed up to leave etc.  We got a tenant who was great for the first few months, but now is very behind on her rent.  Our property manager wants to file for eviction, but we are concerned that will alert the county that we are renting and trigger the full payment.  We are not trying to avoid paying back the program, we just don't have the money to pay it all back at once.  I don't really understand the motivation of the program for wanting to keep people in their home for so long (Clearly she wasn't an investor trying to flip a property, having lived there for almost 12 years).  The contract states that they are able to put a lien on the house for non - payment.  Hoping someone has some advice on how to handle this.  Thanks!

Thanks Alicia.  The program has no expiration date.  That's the thing I don't understand.  It makes no sense to me why they would do that.  Sorry for what I'm sure is a stupid question, but what do you mean "cash for keys?"  She owes us $2k, so I'm definitely not paying her anything to get out.

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Cash for keys is literally paying a bad tenant to move out.  It sounds counter intuitive and understandably can make a landlord cringe especially when someone is already behind on payments.  In your situation however I agree with Alicia.  The price you will pay to entice a renter to move out is FAR less than going through the eviction process and running the risk of your loan to be called.  You are openly admitting your in breach of contract.  I would bite the bullet, evict the tenant and make sure you get a quality tenant in there so you can start cash flowing again.  

May want to get a new property manager as well.  They don't seem to be working out well for you all.  

Well but here's the thing. Was she given money by the county to help buy a home that she otherwise would not have been able to afford.

When you look at it from their perspective, they are saying that once you sell it or rent it, you will realize a gain so why should you gain from their money? 

As it is, are they asking for any interest? If not, then your wife would have gotten an interest free loan for 12 years. Thats huge. I wouldn't condemn the county for something like that. I would commend them for helping people buy a home.

Hopefully, that property would have appreciated over time as well so that equity gain to you is a direct result of their interest free loan to your wife. 

Normally, I have no problem jumping on local govt. But in this case, it seems very fair to me in what they did. Ultimately, they gave your wife free money so she could buy a house. If she didn't want it, she wasn't obligated to take it. 

Most local govts don't even do that (i.e. offer down payment money). 

In terms of how you solve that, though, you need to get the tenant out of there regardless. I'd offer them cash for keys as well. You're out the 2k no matter what. You can either spend 500 to 1k in attorney fees plus go anywhere from 1 to 6 mos more not receiving rent (depends on your county laws). Or offer them 1k to move out in a week and save yourself the headache.

But if I were you, I would seriously considering selling the house so you can pay off that DP assistance money. I would either do that or, if you want to continue to rent it,  make sure you have the money to pay it back.

Unless there was something onerous in the money or repayment of money by the county (i.e. did they give your wife 5k and are now asking for 10k?), then I don't see anything wrong at all with what the county did in tying the repayment of that money til any time the house is sold or rented.

They are basically suggesting that their DPA program was solely meant to be a one time interest free loan that would eventually have to be repaid at a later date - UNLESS you lived there forever.

At the end of the day, it was still an interest free loan...... so she did good.

Thanks Mike.  I should clarify.  I'm not suggesting they did anything wrong.  I'm just wondering why they want the money in one lump sum if we rent it out.  Makes perfect sense if we sell because we would have all the money at one time.  I we rent, we don't.  That's all.

Originally posted by @William Johns :

Thanks Mike.  I should clarify.  I'm not suggesting they did anything wrong.  I'm just wondering why they want the money in one lump sum if we rent it out.  Makes perfect sense if we sell because we would have all the money at one time.  I we rent, we don't.  That's all.

 Because the program's goal is to have homeowners, not renters. If you want to keep the house, and it's worth renting out, do as Russell says and refinance to a conventional loan. Then you are able to pay back the program and rent the house out. 

Once you made the leap from living in the house to renting it out, you were acting as an investor rather than a member of the community. Your only vested interest in the community at this point, from their point of view, is as someone who is making money on an investment, not someone who is stabilizing a neighborhood or working diligently to make their own home nice. 

What was the amount of down payment assistance? If it's only a few thousand dollars, and you can't come up with that kind of money, you really, really don't want to be a landlord. 

@William Johns , almost every piece of advice here is right on the money. 

I know it hurts to pay someone to get out even though they already owe you money, but they have the upper hand here. They'll owe you a lot more before this is over if you can't incentivize them to leave voluntarily and you'll have lost income, court fees, and potentially revenge damage to deal with. I once offered a tenant to pay for their moving truck if they left the place spotless when they left, and that was enough to avoid a lengthy eviction process.

Everyone who says you need to fire your property manager is also correct, in my opinion. I'm assuming that "very behind" is more than 3 days late, which is when your manager should have posted first notice. I would say that most of the time when rents become very late it's 50% the tenant's fault, and 50% the manager's, because the manager either wasn't firm, didn't properly vet the tenant, didn't take the time to understand the situation, didn't make the rent payment their first priority before cable, electric bills, water, car payments, etc. 

Refinancing your loan will also make you legitimate. Right now at best you're being dishonest, and at worst you're breaking a local law. A few thousand bucks in closing costs are a small price to pay for peace of mind and maintaining your integrity.

Let us know what happens, and good luck.

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Originally posted by @William Johns :

Thanks JD.  It's north of $20k.

 In that situation, if the property is profitable as a rental property, I would simply go conventional finance. Besides, you'll be doing a good deed, as those funds will likely help someone else with homeownership. 

Thanks everyone for the advice.  It is greatly appreciated. The property manager has been itching to file for a while now and has been diligent about communicating with us and the tenant.  We have been holding her off from taking action, hoping that the tenant would get back on track as they had agreed to do by June 10th.  Again, it was not our intention to be dishonest.  The information that they have posted on their website (which I just checked again today), says nothing about renting, but the original contract (that we didn't find until later) does.  We're just hoping they will let us pay it back in monthly installments.  Lesson learned.  Thanks again for the advice!

Originally posted by @William Johns :

Hey Everyone.  My wife bought her house in Maryland in 2004.  She used a downpayment assistance program through the county.  I moved in, in 2010 and we got married in 2012.  Last year, we decided to move to California.  We looked up the terms of the program online and it said that the amount would have to be paid back if we sold the house.  We planned to rent the house, so we weren't worried.  As we were packing up to leave we found her original contract which stated that we'd have to pay the full amount back immediately if we rented it out as well.  We tried to find out whether we could pay it back in installments without alerting the program that we were leaving etc. We weren't able to get a conclusive answer so we took our chances and rented anyway since we were already packed up to leave etc.  We got a tenant who was great for the first few months, but now is very behind on her rent.  Our property manager wants to file for eviction, but we are concerned that will alert the county that we are renting and trigger the full payment.  We are not trying to avoid paying back the program, we just don't have the money to pay it all back at once.  I don't really understand the motivation of the program for wanting to keep people in their home for so long (Clearly she wasn't an investor trying to flip a property, having lived there for almost 12 years).  The contract states that they are able to put a lien on the house for non - payment.  Hoping someone has some advice on how to handle this.  Thanks!

HI Williams,

I am pretty familiar with these down payment assistance programs.

Its usually city, locale, or county wide programs that are the strictest with regards to the use of the property. 

Most state wide DPA (down payment assistance) programs usually dont have convenents and title restrictions that restrict rental uses however local programs typically do, especially the ones that offer 17-20% DPA (you bring in 3% or less and they give you a silent 17% second so that you can borrow 80% with no monthly MI)

I would look the contract or loan note over to see when the rental restriction is good for, sometimes these are 7-12 years or 20 + years it depends on the city, locale, or county.

Some are for the life of the property, i've seen low income DPA's that restrict who you sell the property to (low income must be sold to low income person etc) and even ones that limit your ability to sell or require a profit share if you sell.

These DPA programs look great upfront because they help you with all this money and it is "great," but the money comes at severe loss of control and benefits of property ownership sometimes by limiting the bundle of rights ( right of possession, exclusion, control, enjoyment, and disposition).

A Solution could be to review the mortgage note terms for that DPA program to see if the money is forgiven after a period of time or if you will have to pay it back eventually. If you have to pay back and it makes sense to pay it back now you can analze the current market value of the property to see where the current loan to value is (all liens divided by current market value) to see if you can refinance/payoff all liens with a new conventional loan or if its worth to wait to see if the DPA can be forgiven at a future time. Each DPA program varies however most buyers never read it and loan officers often times only talk about the pros not the cons to potential borrowers.

I doubt the DPA lien holder or loan servicer is looking at county eviction records to exercise a due on sale and make their total loan payable but if they are you may want to get your options prepared ahead of time.

@William Johns I have worked for the government for a long time, and I can tell you there is zero communication between departments. So I think you will be fine if you evict the tenant, but if you want to play it safe cash for keys should do the trick as well.

I also wouldn't worry about it. I bought a house, not with downpayment assistance, but right after buying, got some HUD block grant money to do a ton of renovations. Same rules as your situation. I did rent the place out for a couple years, and then decided to sell because long-distance landlording wasn't working out for me (moved out of state).

Nobody had a clue I rented out the place.  What they do, is they put a lien against the property, so when you sell, it will show up as something that has to be paid out of the proceeds.

I really wouldn't worry about it.  If anyone had the time to notice (you'd be assuming some government agency wasn't short-staffed and had someone on staff who noticed or cared - LOLOL), and actually notified you of a problem - then you deal with it.  But, this would be one of those "easier to get forgiveness than permission" situations.

Around my neck of the woods, we have a program similar to that, sounds like word for word, but it's definitely a local thing n only 25% of urs (20k+ 😵). Our program, LHOP, places a lien for $5k that only needs to b repaid if the house isn't a primary residence anymore n the lien activates on a resale attempt. Interest free too. I would say it's best just to double check the wording to cover urself. They may not catch the renting but they will definitely catch the refinancing or the selling n the "due on sale" clause comes quick lol