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How a Subject To Mortgage Works

How does a subject to mortgage work?

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

A subject to mortgage is a way to buy a property without being legally responsible for the mortgage on the property. With a subject to mortgage, the property seller transfers legal title to the property to the buyer but the current mortgage on the property remains in place and in the seller’s name. The property buyer agrees to make a monthly payment to the seller which in turn the seller uses to continue to make the monthly mortgage payment.

When a subject to mortgage is completed, the property buyer legally owns the property and can do with it what she or he wants including renting out or renovating the property. Even though the property seller remains responsible for the mortgage, she or he has no control over how the property is used and may be required to vacate the property.

It is important to highlight that because a subject to mortgage involves transferring ownership of the property, it may trigger an acceleration or alienation clause in the mortgage which requires the borrower to immediately repay the outstanding loan balance. Before you enter into a subject to mortgage, we highly recommend that you review your mortgage documents to determine if your loan has an acceleration clause, as this may defeat the purpose of the transaction.

A subject to mortgage is different than assuming a mortgage. When a property buyer assumes a mortgage, the mortgage is transferred to the buyer and the buyer is legally responsible for the mortgage. When you assume a mortgage to buy a home, after the purchase transaction is complete both the mortgage and the property title are in the buyer’s name. In comparison, if you use a subject to mortgage to buy a home, only the property title is in the buyer’s name while the seller remains listed as the borrower on the mortgage.

Please note that aside from FHA mortgages, most mortgages are not assumable, which means you cannot transfer them to a new borrower without the lender’s permission. In very rare instances, a lender may allow someone to assume your mortgage even if this provision is not contained in your mortgage note. In either case, lenders usually review the credit score, debt-to-income ratio and employment status of the person(s) assuming the mortgage to make sure she or he can afford the monthly loan payment.

Because a subject to mortgage does not require the lender’s permission -- at least not initially -- the transaction is negotiated directly between the property seller and buyer. Depending on the value of the property and current mortgage balance, the buyer may agree to make a down payment, although unlike a standard mortgage to buy a home, a down payment is not required. In fact, in many cases, a subject to mortgage is used to buy a property with no down payment.

Additionally, the seller may request the buyer’s credit report and attempt to verify her or his employment (to confirm the buyer can make the required monthly payment), but this may be challenging depending on the resources available to seller.

With a subject to mortgage, the buyer agrees to make a specified monthly payment to the seller and the seller agrees to pay the mortgage. It is also important to factor in property tax, homeowners insurance and homeowners association (HOA) dues, if applicable. If these fees are not paid, the property could go into default.

The monthly payments from the buyer to the seller and the total amount of the subject to mortgage are usually based on the outstanding mortgage balance on the property. At the end of the subject to mortgage, the existing mortgage is paid off and the lender releases the seller from the loan obligation.

It is important to highlight that with a subject to mortgage, the seller remains responsible for the mortgage payments. If the seller stops making the payments, the lender can foreclose on the loan and seize the property from the buyer.

Additionally, although there is usually a contract between the buyer and the seller, if the buyer stops making the agreed upon payments, ownership of the property may not revert to the seller. So if the buyer stops making payments because the property value declines or for other reasons, the seller may have limited options to enforce the subject to mortgage.

A subject to mortgage provides multiple benefits and risks for both the property buyer and seller:

Advantages and Disadvantages of a Subject To Mortgage for the Property Buyer

Buyer Advantages

Buy a home without applying for a mortgage

Own a home without the legal obligation of a mortgage

The ability to purchase a home with no down payment or credit score

Buyer Disadvantages

Limited options if the property value declines

Could lose property if the seller does not pay the mortgage

Advantages and Disadvantages of a Subject To Mortgage for the Property Seller

Seller Advantages

Quickly sell a home if you cannot afford the mortgage

Income from monthly payment from the buyer

Potential to reduce housing costs by eliminating or lowering property tax and homeowners insurance

Seller Disadvantages

You are responsible for the mortgage but do not own the property

Limited options if the buyer stops making the subject to mortgage payments

Your credit remains at risk if the mortgage is not paid

The lender can foreclose if the buyer does not pay property tax or homeowners insurance

A subject to mortgage usually occurs when the current property owner cannot afford the mortgage and wants to quickly sell the home. Additionally, if traditional financing options are unavailable or too expensive for the property buyer, then a subject to mortgage may make sense, at least for the buyer. Potential scenarios where this may be the case are if the buyer has poor credit or wants to fix and flip the property.

If you want to enter into a subject to mortgage, your best approach is to hire a qualified real estate attorney to negotiate the transaction. Because of the unique risks involved with a subject to mortgage, it is important that you obtain the right legal advice and guidance.

The attorney can also prepare the required documents and make sure that the transaction is recorded properly with your local government. Additionally, the attorney can review the existing loan documents, including the acceleration clause, if applicable, to determine the feasibility of a subject to mortgage.

In closing, a subject to mortgage is a very uncommon way to buy a home because of the considerable challenges it presents. From a property owner’s standpoint, it should be viewed as the financing option of last resort. From the property buyer's perspective, a subject to mortgage offers benefits but significant risks as well.

A potential alternative to a subject to mortgage is to acquire a 99% interest in the property with the current property owner retaining a 1% interest.  Set up a joint bank account with the current property owner from which the mortgage is paid. This approach may avoid triggering the acceleration or alienation clause because the current property owner maintains an ownership interest in the property.  The ownership transfer could be implemented through a new grant deed or quitclaim. 

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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