Investing in Property ‘Subject To’ Mortgages: A Smart Strategy Not To Be Missed

What is a ‘Subject To’ Mortgage?

When a property is purchased ‘subject to’ an existing mortgage, it means the buyer agrees to take over the property along with an existing loan, but does not become personally liable for that debt. This presents a unique opportunity wherein the buyer can gain ownership without the responsibility of the mortgage tied directly to their name.

Contrast With Assumption of Mortgage

In an assumption of mortgage, the buyer assumes the responsibility to pay off the existing loan and becomes personally liable. This contrasts with the ‘Subject To’ method, where the buyer stands to lose any investments made if they default but isn’t liable for the entire debt. Since the debt obligation doesn’t officially transfer to the buyer, the original owner retains responsibility.

Benefits of ‘Subject To’ Mortgages

• Limited Liability: The new buyer isn’t personally liable for the existing mortgage debt.
• Lower Down Payments: Many ‘Subject To’ deals require significantly lower down payments compared to traditional financing methods.
• Creative Financing: Ideal for investors lacking large capital who want to start investing in real estate.
• Potential for Profit: If managed well, the buyer can profit from renting out or selling the property later.

Example of ‘Subject To’ Financing

Let’s illustrate with an example:

Abel is keen on investing in land but doesn’t have a large amount to spend. He finds a piece of land worth $100,000. Abel decides to purchase this land for $1,000 cash and agrees to a ‘Subject To’ arrangement regarding the remaining $99,000 mortgage.

If Abel defaults on the mortgage payments, he would lose his $1,000 down payment but isn’t personally responsible for the $99,000 debt attached to the property.

Risks to Consider

While ‘Subject To’ financing offers multiple advantages, it’s essential to acknowledge the risks:

• Foreclosure: If the buyer defaults on payments, the property can still be foreclosed upon by the lender.
• Due On Sale Clásuse: Many original mortgage contracts have a ‘due on sale’ clause which means upon sale or transfer, the remaining mortgage balance becomes immediately due.

Frequently Asked Questions

What happens if the lender learns about the ‘Subject To’ agreement?

If the lender discovers the property transfer, they may invoke the ‘due on sale’ clause requiring the outstanding mortgage balance to be paid in full immediately.

Is there a way to mitigate the risks involved?

Yes, consider stipulating terms within the agreement to handle situations where the lender invokes the due on sale clause. An exit strategy should always be in place.

How complicated is the legal aspect?

For this type of transaction, a professional’s advice is needed—this may be a real estate attorney or experienced agent to ensure compliance with local laws and mortgage terms.

Related Terms: Assumption of Mortgage, Creative Financing, Equity Financing, Down Payment, Debt Liability.