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The term subject to mortgage is often used to indicate a situation in which real estate is transferred or assigned to someone other than the party who holds the mortgage. In such a situation, the buyer of the property begins to pay the interest and principal payments on the property. He does not, however, agree to take on liability for the mortgage or receive the real estate title. Instead, the original borrower, who has an outstanding mortgage on the property, remains officially responsible for repaying the mortgage lender.
In most home-buying situations, a buyer pays the owner of the property in full. Usually, he accomplishes this with his own money or by taking on a mortgage. In some cases, however, a party may take over payments for a property without obtaining a mortgage or paying the owner in full. If he does not assume the mortgage, the owner of the property remains legally responsible for paying the mortgage. The term subject to mortgage is usually applied to this type of arrangement because the payments for the property have been transferred but the right and financial responsibility for the real estate are still subject to the mortgage contract.
A property transfer or assignment that is subject to mortgage is risky for both the new buyer and the original owner. In such a situation, the two are dependent on each other for the success of the arrangement. If the new buyer defaults on his payment, the owner may face foreclosure on the property. To stay out of foreclosure, he would have to resume his mortgage payments without regard to whether or not he could afford them. The buyer, on the other hand, risks being evicted in the event the payments he makes are improperly applied and the mortgage lender forecloses on the property.
A subject to mortgage situation is often compared to an assumption since, in both cases, a new party takes over the mortgage payment. In an assumption, however, the new buyer gets the title to the property and all the responsibility for paying for it. The original borrower is relinquished of his responsibility for paying the mortgage.
Sometimes the term subject to mortgage is also used to indicate a mortgage lien that would affect the sale of a property. This occurs when there is more than one mortgage on a property. For example, a person cannot buy or assume a home by only considering the second mortgage on the property. Instead, the sale or assumption of the property is subject to the first mortgage.
@Soulfox -- that is exactly why a lot of these arrangements are between friends. It is hard for someone with a mortgage to turn the keys over to someone he or she doesn't know that well because of the risk of default.
Even when the agreement is between friends, default is a major risk. Of course, defaulting is a quick way to end a friendship, too.
The motto here is to be very, very careful if entering into an agreement like this.
You will see a lot of these arrangements during times when credit requirements keep people from taking out mortgages. Think of it as a "rent to own" agreement and you'll get the idea.
The problem, of course, is that the new buyer can walk out of the arrangement and leave the original buyer on the hook. That happens more often than you might think and can turn into a mess in a hurry.