Rain City Guide

Distressed property rental income: Who’s money is it when a home goes into default?

Tim on 08 12, 2009

This is both a legal question and an ethical issue.

I’ve bumped into this, not in the workplace, but out looking at property :   A home that is in process of either a short sale or heading to foreclosure has tenants.  It is not that a homeowner does not have a right to rent a home or even part of their home, but when a homeowner is involved in a short sale, is in arrears (default), most lenders require substantial paperwork from the owner justifying their hardship. My guess is that the rental income could be kept under the radar.   Many homes in default are the result of job loss or other hardship due to medical reasons or other life issues.   In some cases though, defaults are a result of excessive equity withdrawal from serial refinancing.

Homeowners in a short sale are typically not allowed any proceeds from the sale as a condition of approval.  But, if the homeowner is receiving rental income from the property, should that money be forfeited to the lender to help cure the debt?

I have not been able to find the languange in a standard Washington State Deed of Trust form, but I thought I read somewhere that rents are collectible by the lender to help cure the debt when a default has occurred.   I could be very mistaken.

About the Author: Tim Kane

• Author's website: http://www.legacyescrow.net
• More posts by Tim
• email the author

My wife Lynlee and I own and manage Legacy Escrow Service, Inc. We live in Snohomish and have three kids. When we have spare time, we are usually doing home improvements around the house or we are shuttling kids to soccer, basketball or other activities.