Real estate investors always hunt the creative options for secure funding. Along with traditional mortgages, private money lenders, and hard money lenders, subject to mortgage contracts are also an appealing option and a popular strategy among real estate investors.
If carried out wisely and responsibly, a mortgage contract can prove a financial benefit for the buyer.
What is subject to a mortgage contract?
It is a way of transferring the deed on the buyer’s name without being legally responsible for the mortgage on the property. The buyer agrees to pay the mortgage, but it remains in the seller’s name.
In other words, the seller is still responsible for paying the loan. Buyers agree to pay the mortgage in monthly payments, which the seller uses to pay the mortgage.
It can also trigger the acceleration or alienation clause, which demands the borrower to pay the mortgage at once. A buyer should always review the mortgage documents carefully to know whether there is an acceleration clause.
Suppose halfway through the process; the buyer decides to sell the property. In that case, he will not be responsible for paying the remaining mortgage, and the whole responsibility will be on the initial seller. Even if the buyer stops making payments, the property’s ownership will not revert to the original seller.
Moreover, if the seller does not make payments timely, the lender reserves the right to foreclose the loan and seize the buyer’s property.
After completing the subject to mortgage contract, the buyer becomes the property’s legal owner. He can rent out or renovate the property as he wants.
What is the difference between subject to a mortgage and assuming a mortgage?
Subject to mortgage is not the same as assuming a mortgage. In assuming a mortgage, it legally transfers to the buyer, and the responsibility of paying the mortgage legally shifts to the buyer. When the buyer completes the transaction, the mortgage and title shift to the buyer’s name.
In subject to a mortgage, only the property title shifts to the buyer’s name, whereas the original seller remains the legal borrower and responsible for paying the mortgage.
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Why should one buy this kind of property?
There are many benefits of buying a subject to mortgage property.
- The biggest benefit is the low cost of buying a home. The buyer doesn’t have to worry about origination fees, broker commissions, or closing costs. Once transactions are completed, the buyer can earn more profits by renting or reselling the property.
- The home buyers prefer to buy the subject to mortgage property at existing low-interest rates. If the current interest rate is 8% and the seller is selling its property at a 6% fixed interest rate, the variance of 2% can make a huge difference in the monthly payment.
- Buyers often take an interest in the subject to mortgage property because they may not qualify for a loan with favorable interest rates. So, taking a pre-existing mortgage loan makes the overall process easy and cost-effective.
- It is also a wise option for real estate investors to land a profitable deal. They check county records and locate the borrowers with foreclosed properties to make a deal and later use that property to gain high profits.
The best approach to enter in the subject to mortgage contract
If you are also interested in buying a subject to pre-existing mortgage property, it is better to hire an expert real estate attorney for settling the transactions. As there are many risks linked with the contract, getting useful and honest legal advice is essential.
Your hired attorney makes sure that the transaction is documented in the record of the local government. Before the contract, the attorney prepares all the required documents, reviews the existing loan documents, and checks the acceleration clause to ensure a safe and profitable deal.