The term “subject-to” mortgag refers to a real estate transaction in which the buyer takes over the property while the existing mortgage remains in the seller’s name. The buyer does not formally assume the mortgage, meaning the seller retains the legal responsibility to pay the mortgage. Here’s how it works:
Key Features:
- Seller’s Mortgage Stays in Place: The existing mortgage loan remains under the seller’s name and continues with its original terms, including the interest rate and monthly payments.
- Buyer’s Role:
- The buyer agrees to make the monthly mortgage payments on behalf of the seller, but the loan itself is not transferred to the buyer.
- If the buyer fails to make payments, the seller is still legally liable for the debt.
- Ownership Transfer: The buyer gets the title to the property and becomes the legal owner, even though the seller’s mortgage remains active.
- “Due on Sale” Clause: Many mortgages include a “due on sale” clause, which allows the lender to demand full repayment of the loan when the property is sold. Some subject-to transactions work around this, but it carries risks.
- Benefits for the Buyer:
- Potential for lower interest rates if the seller’s loan has favorable terms.
- Avoiding the need to qualify for a new mortgage.
- Risks for the Seller:
- Retains legal responsibility for the mortgage.
- Risk of default if the buyer fails to pay, potentially harming the seller’s credit.
Common Situations for “Subject to Mortgage” Transactions:
- Seller is facing foreclosure and needs a quick sale.
- Buyer is unable to qualify for a traditional mortgage but can afford the payments.
- Seller’s mortgage terms are more favorable than current market rates.
Buyer-Methods to Promise Repayment of the Loan:
The buyer’s promise to take over the responsibility of making monthly mortgage payments in a “subject to mortgage” transaction is typically formalized in the Purchase Agreement and sometimes supplemented by additional legal documents. Here are the forms this promise may take:
1. Purchase Agreement with Specific “Subject to Mortgage” Clause
- The agreement explicitly states that the buyer will make the monthly mortgage payments on behalf of the seller.
- Example Clause:
“The buyer agrees to take possession of the property and make monthly mortgage payments to [Lender Name], ensuring the loan remains current, as part of this subject-to transaction. The seller retains legal liability for the loan with the lender.”
2. Promissory Note (Optional)
- If additional terms or payments to the seller are involved, the buyer may sign a promissory note confirming their obligation to pay the mortgage.
- The note can specify:
- Payment schedule.
- Consequences of non-payment.
3. Escrow Agreement (Optional)
- If an escrow account is used, the buyer agrees to deposit the payment into escrow, and the escrow service ensures the mortgage is paid.
4. Affidavit or Side Agreement
- A separate agreement memorializes the buyer’s promise to pay the mortgage, ensuring all terms are understood and agreed upon.
- Example:
- Acknowledgment that the seller retains liability.
- Confirmation that the buyer will indemnify the seller in case of default.
5. Power of Attorney or Authorization to Communicate with Lender
- The seller may authorize the buyer to make payments directly to the lender, formalized in a signed authorization.
Legal Considerations:
This promise is not a formal assumption of the mortgage (as in lender-approved loan assumption), so lenders might not directly recognize the buyer’s promise. For this reason:
- Involvement of a real estate attorney is critical to ensure the terms are enforceable.
- Any potential risks, such as triggering the “due on sale” clause, should be disclosed and acknowledged.
These steps protect both parties and formalize the buyer’s obligation.
This strategy can be complex and often requires the involvement of real estate professionals and attorneys to manage the risks and ensure compliance with legal requirements.
Disclaimer: The information provided herein does not, and is not intended to constitute legal advice. All content on this website is for general informational purposes only. Consult your attorney.