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“Subject To” is the latest creative financing solution boasted by well-known influencer investors and trending on social media platforms such as Instagram and TikTok. Influencers are presenting this creative trend as a solution for many overburdened homeowners crippled by their monthly mortgage payments by offering the homeowner cash to sell their property and relieving them of their mortgage obligations. This week’s blog focuses on a prevalent scam targeting many homeowners, sellers, and real estate agents.

What Does it Mean to Sell Property “Subject To”?

“Subject To” is a term used to refer to a situation where a buyer purchases a property and takes title to the property, but the existing loan remains in the name of the seller. An investor contacts the homeowner or their real estate agent, offers to purchase their property in cash, and takes “Subject To” the homeowner’s existing mortgage. At closing, the homeowner can move on from the property and be relieved of their mortgage obligations.

What Are The Risks?

The main issue with the “Subject To” offer is that the seller’s name will remain on the existing note and mortgage, and the existing lender is not notified of the sale. This means that the seller is still responsible for payment of the full amount of the loan, even when they no longer own the property. Further, the seller is relying on a third-party purchaser to continue making the mortgage payments on their behalf without recourse to the third-party purchaser for non-payment. This could ultimately affect the seller’s creditworthiness and ability to secure a loan in the future. Finally, most loan documents contain a “Due on Sale” provision, meaning that the lender can call the full amount of the loan due in full in the event of a sale or transfer.

Be warned that some investors may even offer creative solutions to address the foregoing concerns, such as purchasing the property in a trust or pre-signing a deed-in-lieu of foreclosure in the event of non-payment. However, the fact remains that the seller’s name will remain on the note and mortgage.

“Subject To” vs. “Assumption of Mortgage”

Unlike a “Subject To” transaction, an “Assumption of Mortgage” is where a buyer agrees to assume the seller’s existing mortgage.  The buyer notifies the lender about their desire to assume the seller’s mortgage and undergoes an approval process. In this situation, the lender confirms that the buyer is creditworthy and that he has sufficient funds to assume the loan. After the buyer is approved, the buyer signs an “Assumption of Mortgage” at closing agreeing to assume the mortgage payments and to undertake all obligations and responsibilities of the borrower under the existing loan documents. Then, the lender releases the seller from the note, mortgage, and all obligations under the loan.

For the reasons mentioned above, if an investor approaches you offering to purchase property “Subject To” an existing mortgage, be very cautious in entertaining the offer as it is likely a scam. If you have any questions on the matters discussed in this blog, please do not hesitate to contact your trusted local real estate attorney.

Picture of Kathryn Huynh, Esq.

Kathryn Huynh, Esq.

Kathryn focuses her practice on commercial and residential real property transactions, including, without limitation, developer representation, landlord representation, and purchaser and seller representation in connection with residential and commercial real estate transactions.

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