Can my niece buy my home with bad credit?

Q: I am planning on retiring to a different state and selling my current home. My niece is very interested in purchasing it, but she has two problems. She is self-employed, working out of her home, and earning a decent income. Her husband also earns a decent income but had a bad credit history before they married two years ago. I would like to sell my house to my niece, but we know she won't qualify for a mortgage, although she and her husband earn more than enough to pay their bills. Is there a way we can work this out to both of our advantages? She wants the advantage of being able to build up equity in a home, and I really don't want to keep the mortgage in my name. Any ideas? —Janie K., Hammonton, N.J.

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A: There's no reason you can't sell your home and issue a loan to your niece, based on terms you negotiate, just as if you were a bank. You'll need a lawyer to draw up the papers, but sellers do this all the time.

There are, however, a few things to think about. First, you won't get cash for your house -- you'll get what amounts to a bond paying a fixed interest rate (which is taxable as income.) As a retiree, it's likely you'd be investing the proceeds of the house anyway, and a bond or other fixed-income payment is not a bad way to go.

But in this case, you're investing in your niece, with none of the guarantees you'd get from buying a bond backed by, say, the federal government. That brings greater risks, and you should expect to get a higher interest rate to compensate you for that.

You could also co-sign a loan in her name, but the effect is pretty much the same. You're taking on the risk that if she and her husband can't repay the loan, you'll be on the hook for it. How secure are their jobs? If they hit rough times, how would you feel about covering their payments until they got back on their feet?

An alternative would be to back her with your financial resources for a short period of time -- until she and her husband are able to get credit on their own. (How bad was her husband's credit problem? How long ago?) Talk to a banker you trust and find out how long they'll have to maintain good credit to qualify for a mortgage. You could then structure a short-term loan (or co-sign a short-term mortgage) that would get them on their own and get you off the hook at the same time.