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Buy Property "Subject To" Mortgage

Posted by 15789465 on

Here's the best-kept secret of the last thirty years: You CAN buy investment real estate with no money down and no credit.  The secret comes from understanding WHY mortgages contain "due on sale" clauses and WHEN lenders won't enforce them. Before 1980 or so, it was common for people to sell their property, and the new owner would just take over the mortgage payments.  The seller either received cash for their equity, or took back part of the financing with something called a "wrap around mortgage."  Everything was fine until the federal government de-regulated the maximum interest rates that could be paid on savings accounts and CDs. Typically, savings and loans originated mortgages and kept them until paid in full. S&Ls received interest income from the loans, and they paid interest on savings accounts. If competition forced them to pay 12% interest on savings, they'd get killed if assumable mortgages continued to earn only 6%.  To solve the problem, lenders added due on sale clauses to mortgages.  With such a clause, lenders were able to demand payment in full whenever a property was sold.  It became virtually impossible to buy a property "subject to" an existing mortgage. Fast forward to today. In this environment, do lenders WANT to "call" a mortgage loan and force default, foreclosure, write-offs?  Of course not.  If a property owner could not make his or her payments, would you be a HERO if you bought the property and started making the payments? Of course you would! The due on sale clause is not usually automatic. The lender has the right to call the note. They don't have to, if they don't want to. You should target properties advertised as "possible short sale" or similar words.  Sign a purchase contract that includes a contingency for lender forbearance from exercising the due on sale clause AND an agreement to tack past due payments onto the end of the mortgage term. Explain to the seller that this will be "subject to" and not "assumption."  With an assumption, the lender typically releases the seller from liability on the promissory note, but adds the buyer. With "subject to," the seller still remains liable on the note and the buyer's name is not added.  In other words, with a "subject to" sale, timely payments by the buyer show up on the seller's credit report.  Past due payments by the buyer will hurt the seller's credit.  If the buyer defaults, the foreclosure will show up on the seller's credit report. If the lender sues for a deficiency after a foreclosure, it will sue the seller, not the buyer. In a "subject to" transaction, the buyer is invisible as far as the loan is concerned.  Selling property subject to a mortgage requires a great deal of faith and trust, or a great deal of desperation.  I think many sellers today are desperate for a chance to preserve their credit, for an opportunity to avoid the humiliation of foreclosure, and for freedom from lender's collection calls.  I think many lenders are desperate to keep performing loans on their books but can't allow true assumptions because of outdated regulations.  It is the perfect time to invest with no money down and no credit. One last piece of advice:  Don't try to hide this from the lender.  Be up front and honest. You both want the same thing: a performing loan.  Good luck, and good investing!

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9 comments

  • Where a third part mortgage is involved, what would be the procedure to sale the property to buyer:
    for example, Smith is the owner of the property and mortgages the same with Johns for the loan borrowed by Adams. Smith intends to transfer the property to Hamna subject to mortgage and Hamna consented to to act as mortgagor for adams loan extended by Johns.

    appreciate ur quick response…..

    Malik Nousherwan Awan on
  • Hi Delora, I recommend contacting the mortgage company immediately after the contract is signed but before the deed is executed. Just make sure you have that contingency in your contract so that if the mortgage company doesn’t approve the transaction, you can cancel the deal and get your earnest money back, if you paid any.

    Once you have a deed, you have an insurable interest, so you should notify your insurance company. Once you have a deed, you can assess the property in your name and have tax bills come to you.

    I think the problem with taxes and insurance happens to people who try to buy “subject to” in a secretive manner, without talking to the mortgage lender. If you don’t involve the mortgage lender, then you do run into problems if you have a budget mortgage. For those of you not familiar with the term, a budget mortgage is when the borrower pays monthly payments on taxes and insurance to the lender, as part of their regular monthly payment. The lender escrows the money, and then pays the taxes and insurance once a year.

    One of the problems with buying “subject to” but not telling the lender comes about when there is a budget mortgage. That’s because the lender’s computers will say to send the annual insurance premium payment to a particular insurance company on a particular policy for a particular property owner, but that person won’t be the owner any more! If there is a fire, the insurance company will say, “We see that Smith is the insured on this policy, but Smith sold to Jones. So, Smith doesn’t have an insurable interest any more, so we aren’t paying anything.” Jones will say, “But I’ve been making the insurance payments all these years.” The insurance company will say, “Too bad, Jones, we don’t know you from Adam. You don’t have a policy with us. You need to get a refund of your premiums from the mortgage lender.”

    It just causes all sorts of problems if you try to buy “subject to” but you don’t get the lender’s approval. Not just insurance issues, but suppose you did this without telling the lender about it. Suppose five years from now the lender found out, and called the note THEN? They might not be so reluctant to call notes in five years, so you might get foreclosed on.

    If NOW is the time when lenders are most motivated to approve a sale subject to a mortgage, then NOW is the time when you should be doing this. Strike while the iron is hot, as they say.

    deniselevans on
  • Let’s suppose Smith owns the property and Regions has the mortgage. Jones wants to buy the property subject to the mortgage.

    In Alabama, when property has a mortgage on it, the legal title is technically in the name of the lender. In other words, Regions technically has title to the property, and Smith has what is called an “equity of redemption.” That is the right to receive full legal title once the mortgage is paid in full and the legal title passes out of Regions. When legal title passes out of the lender’s name and back to the borrower, that is called “defeasance” or sometimes we say that title “defeased.”

    First, Smith deeds the property to Jones. That’s at the very beginning of the relationship, when Smith agrees to sell the property to Jones “subject to” the existing Regions mortgage. Now Jones has a deed. Regions still has technical legal title, but Jones has a deed and he has the equity of redemption. Smith does not own anything any more.

    When Jones finishes making the payments, Regions will satisfy the mortgage and the title will defease. Title will return to whoever has the equity of redemption. Originally, that was Smith, but now it is Jones.

    To answer the second half of your question, you get clear title when the mortgage has been satisfied.

    deniselevans on
  • Great news! At what point should be the mortgage company be contacted/notified?

    How will the insurance and taxes be handled??

    Delora Pate on
  • How do you get a deed and clear title on this type of transaction?

    Ed Pepperman on

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