Legal Implications of Taking Over Someone’s Mortgage: Risks and Considerations

Buying property “subject to” another person’s mortgage might initially seem like a simple transaction. Realtors and real estate gurus often tout such methods as a way to take over payments without taking title. However, this practice is fraught with legal implications and risks. This article delves into the nuances of this process, highlighting the potential legal pitfalls.

Understanding “Subject to” Transactions

In a straightforward “subject to” transaction, the new buyer assumes the existing mortgage payments while the original borrower remains on the deed. The original lender retains the rights and the lien on the property. While this approach might appear attractive, it requires careful consideration of the legal and financial ramifications.

The central issue is that the new buyer does not take title to the property. Instead, they are only responsible for the mortgage payments. This arrangement can last for a while, but the new buyer could easily skip out, leaving the original borrower still liable for the mortgage. There is no official documentation to relieve the original borrower from the responsibility of making payments or facing foreclosure if the payments are not maintained.

The Due on Sale Clause

One of the most significant legal hurdles to consider is the “due on sale” clause in virtually all mortgages. This clause stipulates that the entire mortgage balance must be paid upon the sale of the property. However, in a “subject to” transaction, the original borrower is selling nothing since the new buyer is merely taking over the mortgage payments.

Despite this, most lenders are indifferent to who pays the mortgage as long as it is paid on time. However, this lack of interest may change if the lender discovers that the person insuring the property is not the same as who is listed on the deed. This discovery could trigger an investigation by the lender, leading to legal issues or even foreclosure proceedings.

The Financial and Legal Risks

There are several potential legal implications and financial risks associated with taking over a mortgage “subject to” without taking title:

Financial Obligations: The original borrower remains financially responsible for the mortgage if the new buyer does not fulfill their payment obligations. This can lead to late fees, penalties, and even foreclosure. Insurance and Taxes: The new buyer must maintain property insurance for the life of the mortgage and ensure that property taxes are paid. Failure to do so could result in the lender pursuing legal action. Lender Approval: If the original buyer wants to sell their property and the new buyer takes over the mortgage, they must obtain the lender's approval. This approval process can be complex and may involve qualifying the new buyer for the loan. Legal Consequences: If the lender discovers that the insurance on the property is not being maintained by the person listed on the deed, they could force the mortgage into default. This could result in the original borrower being sued and having their home foreclosed upon.

The Alternative: Taking Title “Subject to”

When the new buyer takes title “subject to” the existing mortgage, the process is different and involves more scrutiny from the lender. In this scenario, the lender requires the new buyer to undergo a qualification process, providing proof of income and a solid credit history. The lender's approval adds an extra layer of security, but the process is longer and more tedious.

By taking title, the new buyer owns the property and can benefit from any increase in value or other incentives the new loan might offer, such as lower interest rates or origination fees. However, the original borrower is still on the hook for the mortgage, and any legal issues related to the mortgage would still affect them.

Conclusion

While buying property “subject to” another person’s mortgage might seem like a quick and easy solution, it is rife with legal and financial risks. The due on sale clause, lender indifference, and the potential for legal consequences make this approach highly risky. To mitigate these risks, it is essential to thoroughly understand the legal and financial implications and to ensure that all parties involved fully comprehend the terms of the transaction.

If you are considering this type of transaction, consult with a real estate attorney to fully understand the potential ramifications and to ensure that your rights and responsibilities are protected.

Keywords: Mortgage Subject to, Due on Sale Clause, Taking Over Payments