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Southern Loan Servicing, Inc. - 2023

What is a “subject to” mortgage?

This is a sale where the seller is not paying off the existing mortgage, but rather having the new buyer pay the mortgage obligations. That means the seller maintains the responsibility of paying off the loan, but the buyer has agreed to make mortgage payments on behalf of the original seller.

When you buy a property subject-to the existing mortgage, you still go through the process of purchasing the property through a licensed title company/attorney, who will prepare the legal documents including a mortgage and promissory note. This document gets filed with the courthouse stating that the title of the property is transferred over to you as the buyer, yet the existing lien on the property (mortgage in the seller’s name) is not being paid off, rather the payments are still due and you agree to pay them on behalf of the seller.

As interest rates rise a lot of buyers are wanting to try and buy properties in this manner to keep that lower interest rate the seller’s mortgage has.  Often times the buyer will pay to the seller his equity up front and then take over the mortgage payments.  Sometimes this strategy is used when the seller is behind in payments and the new buyer brings the loan current and then continues to make payments.  Recently we have seen sales where the buyer makes monthly installment payments to both the seller for his equity and the mortgage company on behalf of the seller.

What happens if the buyer misses a payment? This will negatively affect the seller’s credit, and comes with some risks.  The bank can still foreclose on the property since they hold the lien against it.

What about the due on sale clause?  Well, this clause gives banks the right to call the loan due upon transfer of title, with a few exceptions.   While we have not really seen this happen since the 1980’s, it is always a risk factor.  In my experience I have only seen the bank call a loan once, and that was when the seller on the property filed for bankruptcy. 

If the mortgage is not in your name are you still liable for the debt?  Absolutely, as you signed a promissory note stating that you were going to make those payments, and nonpayment could significantly affect the sellers credit score and you can still lose the property and any money you put down to purchase it.

Subject to strategies aren’t all that common, but you will find that they can be useful in certain circumstances. Distressed sellers, for example, may be willing to sell subject to if they want to rid themselves of a property immediately. On the other hand, buyers will tend to favor subject to when the interest rates on the existing loan are lower than the current market rates. Read more about it here.

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