Q. Would you please explain what is meant by "purchase subject to existing mortgage" and how this differs from "purchaser to assume existing mortgage"? What does "subject to" mean to the seller, and what does it mean to the purchaser?Does the mortgage remain in the name of the original borrower-seller?
A: This is a most difficult and complex area of real estate law. In the normal course of everyday transactions, the distinction between these terms does not affect either the seller or the buyer's interests. But is advisable to understand the basic differences between these two concepts.
If I own a house on which there is a mortgage, I can sell it to you under many different kinds of arrangements.You can pay all cash for the house, and part of your cash will go to pay off my mortgage. If you obtain new mortgage (deed of trust) I will still get all cash for my house, and again part of these proceeds will be used to pay off my mortgage.
But you may decide to buy my house, assume my mortgage and pay me the difference in cash. For example, I sell my house for $80,000, and there is an existing mortgage for $55,000. You assume (take over) my mortgage obligation, and pay me the balance of $25,000 in cash. If I am so inclined, I may "take back" a second mortgage for all or part of the balance.
But this assumption process is not automatic. Most mortage lenders include a "due-on-sale" clause in the standard deed of trust, which means, in effect, that if you sell your property, the entire mortgage is immediately due and payable.
While a number of courts in this country have determined that these due-on-sale clauses are unenforceable because they go against public policy, the courts in this area have not ruled on this issue. Thus, the first step is to assure yourself that your mortage can, in fact, be assumed.
Your lender will be most cooperative in telling you whether a new buyer can assume your mortgage. Basically, when current mortgage rates are lower than the interest on your mortgage, your lender clearly will allow the assumption. On the other hand, if current mortgage rates are higher than the existing mortgage rate, most lenders would be unwilling to allow the assumption.
The second part of your question concerns the relationship between you, the original borrower, and your lender. The fact that your lender will permit the assumption does not necessarily relieve you of any responsibility to the lender. After all, you borrowed the money from the lender, who checked your credit references and lent you the money on the strength of your financial background.
When the lender allows an assumption, if probably will insist that you remain personally liable, in the event the buyer (the new borrower) defaults. How do you protect yourself?
First, send the lender a letter informing them of the transfer and giving them your new mailing address. Ask the lender to inform you in writing in the event the new buyer defaults. This way, you can take the appropriate steps to stop any threatened foreclosure proceedings.
Second, it is advisable to try to get a complete release from your mortgage lender. Many lenders may be willing to release you, depending on the circumstances of the transaction.
Turning to the relationship between you and the new buyer, there is a basic distinction between an assumption and "taking subject to." If your purchaser merely takes the property "subject to the mortgage," your purchaser is not personally liable or responsible for making the mortgage payments.
While in reality your purchasers will certainly continue to make the payments if they want to stay in the house, the fact remains that if they decide to move out, there would be no personal liability attached to them.
On the other hand, if the new purchaser assumes the deed of trust, they are obligating themselves legally to continue to make the payments. In the unlikely event of foreclosure, they would be responsible for any deficiency, if the foreclosure does not bring sufficient funds to cover the mortgage.
I suggest that sellers of property (the grantor) include the following language in their deed: "The grantee assumes and agrees to pay the existing deed of trust."