Subject to Existing Mortgages: Understanding Real Estate Transactions

Introduction

When it comes to real estate transactions, subject-to-existing-mortgages deals have gained popularity. It involves the purchase of a property while leaving the existing mortgage in place. In this article, we will explore the subject-to-existing-mortgages transactions, how they work, and the potential benefits and risks involved.

Understanding Subject-to-Existing-Mortgages

Definition

Subject-to-existing-mortgages is a real estate term used to describe a transaction where the buyer takes over the seller's existing mortgage payments while not paying off the balance of the mortgage.

How It Works

The buyer and seller will sign a purchase agreement stating that the buyer will take over the existing mortgage payments, while the seller will transfer the property title to the buyer. The buyer will then make the monthly mortgage payments, and the seller will no longer be responsible for the mortgage.

Advantages

• Lower Closing Costs: Subject-to-existing-mortgages deals have lower closing costs as the buyer does not have to apply for a new mortgage.

• Faster Transactions: Since the buyer does not need to go through the entire mortgage application process, the transaction is typically faster.

• Flexible Terms: Buyers can negotiate favorable mortgage terms with the seller, such as a lower interest rate or a longer repayment period.

Risks

• Due-on-Sale Clause: Most mortgages have a due-on-sale clause, which means that the mortgage lender can demand full repayment if the property is sold or transferred. This could lead to the buyer having to pay off the entire mortgage balance or face foreclosure.

• Seller's Credit Score: If the buyer fails to make the mortgage payments, it could negatively affect the seller's credit score.

• No Equity: The buyer does not get any equity in the property until the mortgage is fully paid off, which means they cannot use the property as collateral for a loan.

When to Use Subject-to-Existing-Mortgages

Subject-to-existing-mortgages deals are best used when:

• The seller is in financial distress and cannot continue making mortgage payments.

• The buyer cannot qualify for a new mortgage due to poor credit history or lack of funds.

• The buyer wants to avoid higher closing costs associated with new mortgage applications.

Steps to Take When Using Subject-to-Existing-Mortgages

Step 1: Do Your Due Diligence

Before signing the purchase agreement, ensure that the property has no other liens or judgments against it. Also, confirm that the mortgage payments are up-to-date, and there is no default notice.

Step 2: Hire a Real Estate Attorney

A real estate attorney can help you review the purchase agreement and ensure that you are not taking on any unforeseen liabilities.

Step 3: Get the Mortgage Lender's Approval

Before proceeding with the transaction, the buyer must obtain the mortgage lender's approval. This can be done by informing the lender of the transaction and providing the necessary documentation.

Step 4: Transfer Property Title

After the purchase agreement is signed, the seller will transfer the property title to the buyer.

Step 5: Make Monthly Mortgage Payments

The buyer will then begin making the monthly mortgage payments.

Conclusion

Subject-to-existing-mortgages transactions can be a beneficial way to purchase property, especially when the buyer cannot qualify for a new mortgage. However, it is essential to understand the potential risks involved, such as the due-on-sale clause and the lack of equity. Conducting due diligence and seeking legal advice can help mitigate these risks.

FAQs

1. Is subject-to-existing-mortgages legal?

Yes, subject-to-existing-mortgages transactions are legal.