Subject to Mortgage
Definition
A Subject to Mortgage transaction occurs when a buyer acquires title to a property that has an existing mortgage but does not assume the responsibility or personal liability for the outstanding debt. The buyer is required to continue making mortgage payments to prevent foreclosure. In the event of default, only the buyer’s equity in the property is lost, while the original borrower remains liable for the loan.
Contrast with Assumption of Mortgage: Unlike subject to mortgage, in an assumption of mortgage, the buyer assumes full responsibility for the loan and becomes personally liable for the repayment.
Examples
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Example 1: Queen purchases a house from Parson “subject to” the existing mortgage. The mortgage has an unpaid balance of $140,000, and the agreed sales price is $160,000. Queen pays Parson $20,000 in cash (the difference between the sales price and the mortgage balance) and takes over the monthly mortgage payments. If Queen defaults on these payments, Parson remains liable to the lender for the repayment of the debt and could suffer the consequences of a potential foreclosure.
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Example 2: A homeowner intends to sell his property quickly and agrees to a “subject to mortgage” sale. The buyer pays the homeowner a down payment and agrees to make monthly mortgage payments without formally assuming the mortgage. The seller benefits by offloading the property, but legally remains accountable if the new owner fails to make the necessary payments.
Frequently Asked Questions
1. What does “subject to existing mortgage” mean?
- It means that the buyer takes ownership of the property without assuming personal liability for the existing mortgage balance. The buyer must continue making monthly payments to keep the property but will not be held personally responsible if payments are not made.
2. What are the risks of buying a property subject to mortgage?
- The primary risk is that the buyer can lose their investment and equity in the property if they fail to make the mortgage payments. Additionally, since the original borrower remains liable, this arrangement might complicate the relationship between the buyer and the seller.
3. How does a “subject to mortgage” sale affect the original borrower?
- The original borrower remains responsible for the loan. If the new buyer defaults, the lender can pursue the original borrower for repayment, and negative marks may appear on their credit report.
4. Can a lender call due a loan if the property is sold “subject to” the mortgage?
- Yes, many mortgages contain due-on-sale clauses which allow the lender to demand full repayment if the property is sold “subject to.”
5. Is it legal to sell a property “subject to mortgage”?
- Yes, it is legal, but the seller must disclose it to the lender and understand the potential implications under the loan’s due-on-sale clause.
- Assumption of Mortgage: This occurs when the new buyer assumes the responsibility and liability for the existing mortgage, becoming fully responsible for payments and terms.
- Due-on-Sale Clause: A provision in a mortgage allowing the lender to demand full repayment of the loan if the property is sold or transferred.
- Equity: The difference between the market value of a property and the amount still owed on its mortgage.
- Promissory Note: A financial instrument that contains a written promise by one party to pay another a definite sum of money, either on demand or at a specified future date.
Online Resources
- Nolo: Legal advice and resources on real estate transactions and mortgage terms.
- American Bar Association: Information on property law and real estate guides.
- Investopedia: Comprehensive dictionary and articles on real estate and mortgage concepts.
References
Suggested Books for Further Studies
- “Real Estate Investing for Dummies” by Eric Tyson and Robert S. Griswold
- “The Book on Managing Rental Properties” by Brandon Turner and Heather Turner
- “Real Estate Law (Real Estate Law (Seidel, George))” by Marianne M. Jennings
Real Estate Basics: Subject to Mortgage Fundamentals Quiz
### In a Subject to Mortgage transaction, who remains legally responsible for the mortgage debt?
- [x] The original borrower
- [ ] The new buyer
- [ ] The real estate agent
- [ ] The original lender
> **Explanation:** In a "Subject to Mortgage" transaction, the original borrower remains legally responsible for the existing mortgage debt.
### What risk does the new buyer face when purchasing a property "subject to" an existing mortgage?
- [ ] Gains immediate full ownership without restrictions
- [ ] They might have to pay additional fees
- [x] Losing their equity in the event of default
- [ ] Being sued by the real estate agent
> **Explanation:** The new buyer risks losing their equity in the property if they default on the mortgage payments.
### What typically happens if a lender enforces the due-on-sale clause?
- [ ] The lender provides additional time to pay the loan
- [ ] The new buyer can renegotiate the loan terms
- [ ] The lender can demand full loan repayment immediately
- [ ] The borrower can transfer the mortgage without consequences
> **Explanation:** If the due-on-sale clause is enforced, the lender can demand full repayment of the loan immediately upon transfer of ownership.
### Which of the following accurately describes "equity"?
- [ ] The outstanding mortgage balance
- [x] The difference between a property's market value and the mortgage debt
- [ ] The initial down payment made by the buyer
- [ ] The annual property tax owed
> **Explanation:** Equity represents the difference between the property's current market value and the remaining balance on the mortgage.
### What typically motivates a seller to agree to a "subject to mortgage" sale?
- [x] To quickly offload property responsibility due to financial pressure
- [ ] To unfairly charge a buyer additional interest
- [ ] To ensure permanent liability on the buyer
- [ ] To reduce the property’s assessed value
> **Explanation:** A seller may seek a "subject to mortgage" sale to transfer property responsibility quickly, often due to financial constraints.
### Can buying a property "subject to" an existing mortgage impact the new buyer's credit score?
- [ ] Always remains unaffected
- [ ] Raises it significantly
- [ ] Automatically lowers it
- [x] It may not directly affect it, but missed payments can cause indirect effects
> **Explanation:** While the buyer does not directly assume the mortgage, missed payments can result in foreclosure, indirectly affecting the buyer's financial standing.
### Why might a financed “subject to mortgage” be favorable for a real estate investor?
- [ ] High immediate profits without any risk
- [ ] Reduced requirement for immediate capital outlay
- [x] Potential property appreciation with low initial cash investment
- [ ] Avoids all tax responsibilities
> **Explanation:** Real estate investors may favor "subject to mortgage" deals for potential property appreciation with lower initial capital outlay, albeit with risks.
### In what situation does a seller still suffer consequences after selling “subject to” their mortgage?
- [ ] Never, once sold they have no responsibilities
- [ ] Only if the property’s market value rises
- [ ] If the buyer pays mortgage on time
- [x] If the buyer defaults on the mortgage payments
> **Explanation:** The seller remains on the hook and may suffer consequences like credit damage if the buyer defaults on payments.
### How does a “subject to” deal differ from a traditional sale?
- [x] Buyer doesn’t assume personal liability for the existing mortgage
- [ ] Buyer takes an entirely new loan from the lender
- [ ] Property passes into lender ownership immediately
- [ ] Original mortgage balance becomes nullified
> **Explanation:** In a "subject to" deal, the buyer does not assume personal liability for the existing mortgage; the original borrower retains responsibility for it.
### What is a key legal requirement the seller should follow when arranging a "subject to mortgage" transaction?
- [ ] Ignore the lender’s due-on-sale clause
- [ ] Evade full disclosure of property details
- [x] Inform the lender about the transaction
- [ ] License a third-party mediator
> **Explanation:** The seller should inform the lender about the "subject to mortgage" transaction, complying with legal and mortgage requirements.
