Subject to…What’s the risk?

When you’re buying or selling a property, one option that you might encounter is a subject-to mortgage. In this type of transaction, the buyer takes over the seller's existing mortgage, and they agree to make the mortgage payments moving forward. While subject-to mortgages can be an attractive option for both buyers and sellers, there are also legal risks involved that should be carefully considered.

For Buyers

When buying a property subject to a mortgage, one of the most significant risks is that the mortgage lender may choose to call the loan due immediately upon transfer of ownership. Typically, mortgage lenders have “due on sale” clauses in their mortgage agreements, which allow them to demand full payment of the loan if there is a transfer of ownership. If the lender discovers that the property has been sold subject to the mortgage, they could demand full payment, which could cause significant financial hardship for the buyer.

Another risk for buyers is that the mortgage payments are not made on time, which could result in foreclosure. If the seller fails to make payments on the mortgage, it could eventually lead to the lender foreclosing on the property. Even if the buyer has been making payments to the seller, they may not have been applied to the mortgage, and the property could be at risk of foreclosure.

For Sellers

For sellers, subject-to mortgages can be an appealing way to sell a property quickly. However, there are risks associated with this approach. One risk is that the seller remains legally liable for the mortgage even after they’ve sold the property. If the buyer does not make the mortgage payments, the lender may still be able to come after the seller for payment.

Another risk is that selling the property subject to the mortgage may violate the mortgage agreement. As mentioned earlier, most mortgage agreements have a “due on sale” clause that requires the lender's permission for any transfers of ownership. If the seller goes ahead with the sale without consulting the lender, they could be in violation of the mortgage agreement. This could lead to the lender calling the loan due immediately, resulting in significant financial hardship for the seller.

Conclusion

Subject-to mortgages can be an attractive option for both buyers and sellers, as they allow for a quick sale and the transfer of an existing mortgage. However, there are also significant legal risks to consider. Buyers must be aware of the risks associated with taking over an existing mortgage and should carefully evaluate the seller's ability to make timely mortgage payments. Meanwhile, sellers must consider the legal obligations and potential financial liabilities involved in a subject-to mortgage transaction. As with any real estate transaction, it’s always advisable to seek the advice of a legal professional to review any agreements or contracts involved.

If you are involved in a real estate transaction, it is also important to consult with an attorney who specializes in real estate law to ensure that your rights and interests are protected. At AllenYLaw we have years of experience in dealing with real estate transactions and have seen it all. Contact Allen Yusufov today at (732) 874-1479 or allen@allenylaw.comfor expert representation backed by years and thousands of transactions worth of experience.