Wilmington, NC · Member since 2011 · 160 posts · 1 vote
I probably won't ask this question where it's understandable, because I am confused about what I was reading. Wholesaler finds Motivated seller that has an existing mortgage of 61k. Wholesaler tells seller that he will give him 3k cash at closing, and negotiated leaving the existing loan in place for 1 yr..... Could someone please explain what leaving the existing loan in place actually means and who does it benefit? How does it work?
Specialist · Westlake Village, CA · Member since 2010 · 1k+ posts · 781 votes
13y
The investor makes payments on the existing mortgage.
It can benefit the investor because they won't need to procure financing (such as hard money) & the existing loan may have a lower interest rate & other favorable terms.
The benefit to the seller is that it allows them to sell the property faster & allows more to purchase people since qualifying for financing won't required. Also, it could help their (sellers) FICO score if they are default or slow payers & the investor pays their arrears and continues to make on time payments on their behalf.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
13y
Subject To Mortgage transactions mean a new Buyer takes title to the real property "subject to" the existing mortgage(s). Whereas, Subject to refers to the new Buyer being subordinate to the existing lien and also creating some form of liability for said lien.
There are clauses in many security instruments (Mortgage/Deed of Trust) which allow the Mortgagee to call the loan due if any portion of interest in the real property is transferred. This is the Due on Sale or Alienation Clause. Lot's of BP threads on the DOS if you search. These go hand in hand, you would be wise to read up on them a bit.
When a Seller sells real property it is customary for that property to be contracted to be sold under the condition of free, clear and marketable title. That is, title which does not carry any other interested parties, liens or encumbrances which would be superior interests to the new Buyer. In a Subject To deal, the new Buyer agrees to take said title free and clear "except" to the current Mortgage(s). In a traditional purchase and sale, the existing Mortgage would be paid in full at closing with the new Buyer. In Subject To, the existing Mortgage is not paid off. So the mortgage stays senior to the interests of the new Buyer. The new Buyer agrees contractually to take on some form of liability for existing lien. Generally this is only recognized with the Seller and not the Mortgagee. As Mortgagee recognition is an approved assumption when it takes place.
The legality of Subject To can get tricky from that point forward. Since the security instrument from the Seller stayed in place, there is some level of interest that the Seller still has. The Seller granted interest to the Mortgagee, while the Mortgagee is still present, the interest originating from the Seller is also still present. As such, sometimes a loan can be assumed, formally. This is the formal approval of the Mortgagee to transfer the liability of the note to the new Buyer. In many cases if the loan is not formally assumed, the Seller is not absolved of liability. Any failure to pay as agreed in the note, along with enforcements for default is still the primary liability of the Seller, which is the Borrower contracted to the Mortgagee.
In the OP example, the Seller agrees to allow Buyer, to take title to the property for a payment of $3k now. The Seller has a mortgage on the property, which is not being paid in full. So title is not free and clear for the new buyer. The idea per the post, is to leave that existing mortgage in place of $61k for one year. After which, the Buyer is responsible to pay the mortgage in full.
The Seller has risk in regards to their obligation on the mortgage. The Buyer must pay, usually through third party, on the Seller's mortgage account if they don't the Seller's credit is dinged and/or foreclosure action is brought against the Seller. That is regardless of the Subject To transaction, since the mortgage from the Seller is still the senior instrument on title. Nothing that happens after it matters.
Having an event earlier in time rather than later, such as this one year term, cause the new Buyer to have to take action to achieve the agreement. As we don't know how 2014 will affect new originations, that could be a blessing or a problem. Some, like Ellis, would prefer to not be forced into a short term corner which may limit the future solutions.