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Understanding Mortgage Options: Assumption vs. Subject To

MARCH 17, 2025
House model, a key house, and a calc on a mortgage document.

Exploring real estate financing can be a challenging part of preparing for your license exam. On the surface, terms like “Assuming a Mortgage” and “Buying a Property Subject To a Mortgage” might seem similar. Yet, they harbor differences that are not only significant but can be perilously misleading if misunderstood.

Fortunately, in this article, we’ll meticulously explain what “Assuming” and “Subject To” mean in the context of mortgages and how they affect the seller, buyer, and lender. So, keep reading to deepen your understanding of real estate financing and get closer to acing your exam.

What is an assumable mortgage?

An assumable mortgage is a home loan that allows a new buyer to take over the seller’s mortgage under the same terms rather than obtaining a new one. It means the buyer becomes responsible for the remaining mortgage payments. That can be particularly advantageous if the existing mortgage has terms, like a lower interest rate, more favorable than current market conditions.

The process typically requires lender approval, and not all mortgages are assumable. It’s an option that can benefit buyers and sellers significantly in the right circumstances.

Key features of an Assumable Mortgage:

  1. Transfer of Loan: The buyer “steps into the shoes” of the seller and assumes the ongoing responsibility of making the mortgage payments on the same terms.
  2. Same Interest Rate: The buyer takes over the seller’s existing interest rate, which can be advantageous if rates have risen since the seller acquired the loan.
  3. Lender Approval: The majority of assumable mortgages need lender approval prior to completing the transfer.
  4. Down Payment: If the home’s value exceeds the loan balance, the buyer typically must pay the difference as a down payment or secure secondary financing.
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How does an assumable mortgage work?

An assumable mortgage allows a buyer to take over a seller’s existing mortgage under the same terms. The key steps include finding a property with an assumable mortgage, qualifying for it with the lender, and agreeing to assume the loan’s remaining balance, interest rate, and terms. All parties must sign the legal documents that transfer the mortgage responsibility from the seller to the buyer.

For the buyer, this often results in a lower interest rate than those offered in the current market. After assuming the mortgage, the buyer takes on the responsibility of making the mortgage payments, and the seller becomes free from any further liability under the original agreement.

Pros of an Assumable Mortgage:

  • Inherited Interest Rate: If the existing mortgage has a lower interest rate than current rates, this can be financially beneficial.
  • Reduced Closing Costs: Assumption can involve fewer closing costs than obtaining a new mortgage.
Mortgage Assumption agreement image

Cons of an Assumable Mortgage:

  • Lender Approval Required: Most lenders must approve the buyer to assume the loan, which can be a hurdle.
  • Potential for Higher Costs: If the mortgage has a due-on-sale clause, the lender might require a higher interest rate or a new loan.

What is a “Subject To” Mortgage?

A “Subject To” mortgage is a type of real estate buying where the purchaser buys the property but does not technically assume the seller’s mortgage responsibility. In other words, the mortgage remains in the seller’s name, but the purchaser obligates themselves to pay off the existing loan.

Key features of a “Subject To” Mortgage:

  1. The buyer takes ownership of the property, not the loan: Although the buyer receives the title to the property, they do not sign any agreement with the original lender. This means that, legally, the seller remains responsible for the debt to the lender.
  2. The existing loan remains unchanged: The interest rate, term, and original loan conditions stay the same. If the loan has a low interest rate or favorable terms, this can be beneficial for the buyer.
  3. Risk transfer: Although the buyer agrees to make the payments, the lender can foreclose on the house if payments are not made since the seller remains legally liable for the loan. Therefore, the seller does bear some risk.
  4. No credit check on the buyer: Since the buyer is not asking for a new loan, there’s no need to run a traditional credit approval process, which is advantageous for buyers who have bad or minimal credit history.
  5. “Due-on-Sale Clause: Most loans contain this provision, which permits the bank to call for repayment of the loan in full if title to the property is transferred. While banks may not always enforce this provision, the risk exists and must be taken into account.

Why use a “Subject To” Mortgage?

  • For the Buyer:
    • Avoid the requirements and costs of a new loan.
    • Gain access to an existing loan with a low interest rate.
    • Purchase a property quickly, ideal for urgent situations.
  • For the Seller:
    • Sell a property quickly, especially if facing financial trouble or near foreclosure.
    • Avoid further damage to their credit if the buyer keeps payments current.

“Subject To” Mortgage practical example:

Say that the seller has a $200,000 value home that it can no longer afford the monthly payments on based on its mortgage rate of 3% interest. Along comes a buyer that will buy the house “Subject To” its current mortgage and, therefore, the buyer assumes the monthly payment, yet the loan is never transferred from the seller’s name. The buyer enjoys the lower interest rate and the seller’s house doesn’t go to foreclosure.

Risks to Consider:

  • For the Seller: If the buyer stops making payments, the bank will go after the seller, not the buyer.
  • For the Buyer: There is a risk that the bank will trigger the “due-on-sale” clause and demand full repayment of the loan.
  • Legality: Although it’s legal in many states, there are complexities, and having proper legal advice is essential.

Assume vs subject to mortgage

When analyzing the options of Assume vs. Subject to Mortgage, several key factors, such as financial stability, risk tolerance, and long-term goals, should be considered.

Both involve transferring a property with an existing mortgage, but they are miles apart in terms of legal commitment and danger to both parties.

Assuming a mortgage, for instance, involves the buyer legally inheriting the seller’s debt commitment and becoming the new party liable for the loan. It requires lender approval, where the buyer qualifies under the necessary credit and income criteria.

Although this process may be stricter and entail some expense or prerequisites, it is safer for both the buyer and the seller. By assuming the mortgage, the buyer removes any future liability from the seller, as the bank legally transfers the loan obligation to the new homeowner.

On the other hand, to buy a property “subject to” the existing mortgage means the buyer takes the property and agrees to make the current mortgage payments without legally taking on the debt.

In this case, the loan remains in the seller’s name, which is a major risk for them. If the buyer defaults, the lender can foreclose on the property and also pursue the seller for the due amount.

Whereas “subject to” is a more flexible option and can be utilized to secure a quick transaction (ideal in situations where the buyer does not qualify for a traditional mortgage), it is risky, especially for the seller, who remains legally bound to the lender.

Therefore, when evaluating Assume vs. Subject to Mortgage, it is crucial that both parties understand the risks and benefits. Assuming a mortgage may be more secure and better protect everyone’s interests, while “subject to” could work in special situations, albeit with a greater level of uncertainty.

Before choosing either of these strategies, it is advisable to consult an attorney or real estate expert to ensure the decision aligns with each party’s financial goals and legal capabilities.

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Conclusion

Both assumption and “Subject To” mortgages offer unique advantages and challenges. The primary difference lies in who is liable for the mortgage payment. As a student in real estate, grasping these concepts will enhance your ability to navigate the market effectively and make choices that align with your goals.

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