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.
Related Terms§
- 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§
- Nolo. “Subject to Mortgage.” Nolo, www.nolo.com
- Investopedia. “Assumption of Mortgage.” Investopedia, www.investopedia.com
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
